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Summary
- A reverse stock split is an action to merge stocks into fewer numbers but with more value per share.
- A company may combine the stocks into one for five, or one for ten, depending on the requirement.
- The process ensures that the corresponding value of the stocks increases with each merger.
A reverse stock is a measure when a particular company decides to reduce the number of stocks in its custody by merging two or more shares into one with a corresponding increase in value.
This is done for a variety of purposes, but one of the common reasons can be when the company is in some sort of distress. The process, however, is simple.
For instance, the company may decide to divide the stocks into multiples of five or ten, i.e., to combine them into one for five, or one for ten, depending on the requirement.
Each group of five or 10 stocks will merge into one, but proportionally increasing the value. If a stock costs $5, the value of one stock after the merger of five stocks would be $25. Accordingly, if 10 stocks were combined into one, the final value would be $50.
In essence, a reverse stock split condenses the existing shares of a company into a fewer quantity. The process, therefore, is also called stock consolidation or stock merge, or stock rollback.
A stock merge does not impact the overall value of the company, but since it is usually done to increase the value of the stocks, it may suggest the company may be in some distress. Also, another reason could be when a particular company faces delisting because of minimal stock value.
What May Warrant A Reverse Stock Split
A reverse stock split is a corporate action taken to consolidate a company’s stocks into fewer numbers but with a bigger value per share. Thus, the process ensures more value to the stock.
Such a measure may also be taken when a company wants to show its growing value or rising expectations of its shareholders toward the entity for superior earnings performance in the market.
But before initiating a reverse stock split, the promoters must receive consent from the management or the company board, and from their shareholders.
