How does a reverse stock split work?

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Understanding Reverse Stock Splits

Overview

A reverse stock split is a financial maneuver used by companies to consolidate their outstanding shares, resulting in a higher share price. This process involves a proportional reduction in the number of shares held by existing shareholders.

Mechanics of a Reverse Stock Split

1. Ratio Determination:

   • Companies decide on a specific ratio (e.g., 1:5) to consolidate shares.
   • For every "X" existing shares, shareholders receive "Y" consolidated shares.

2. Shareholder Impact:

   • While the number of shares decreases, the value of each share increases proportionally.
   • Existing shareholders maintain the same ownership percentage but with fewer shares.

3. Market Reaction:

   • The reverse stock split does not alter the market capitalization of the company.
   • Share prices may initially rise, but the overall value remains unchanged.

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