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What are share splits and reverse share splits?
What are share splits and reverse share splits?
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Written by Bryna
Updated over a week ago

What's a share split?

A share split, also known as a stock split, is a corporate action where a company divides its existing shares into multiple shares. For example, if you owned 100 shares before a 2-for-1 split, you'd own 200 shares after the share split.

The general purpose of a share split is to increase the number of shares available while proportionally reducing the price per share. In turn, this makes the company's shares more accessible (in price) to a broader range of investors.

From an investor's perspective, a share split doesn't change the overall value of their investment.

Share splits are typically viewed as a positive sign by investors, as they often indicate that a company is confident about its future prospects and wants to make its shares more accessible to a wider investor base. However, it's important to note that the decision to split shares is ultimately up to the company's management and board of directors, and it may not always be the right strategy for every company.

Example: Let's say you own 100 shares in XYZ Company and they're valued at $2 each for a total value of $200. A 1:2 share split means for every one share you own, you'll now own two. In addition, the value of each share will decrease from $2 to $1 each. You now own 200 shares that are valued at $1 each, meaning your total value remains at $200.

What's a reverse share split?

A reverse share split, also known as a share consolidation, is a corporate action where a company reduces its available shares by combining multiple shares into a single share.

Unlike a share split, where the number of shares increases and the price per share decreases, a reverse stock split reduces the number of shares and increases the price per share proportionally. For example, in a 1-for-5 reverse stock split, every five shares are consolidated into one share.

Companies may opt for a reverse stock split for various reasons such as to meet the minimum price requirements for a particular exchange. By reducing the number of shares available and increasing the price per share, a reverse stock split can help a company meet the minimum price threshold set by an exchange.

Again, from an investor's perspective, a share split doesn't change the overall value of their investment.

However, a reverse stock split may have implications on the liquidity and trading volume of the stock.

Example: Let's say you own 100 shares in XYZ Company and they're valued at $1 each for a total value of $100. A 2:1 share consolidation means for every two shares you own, you'll now own one. In addition, the value of each share will increase from $1 to $2 each. You now own 50 shares that are valued at $2 each, meaning your total value remains at $100.

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