How is reverse split different than split?



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How is reverse split different than split?

1 Answer(s)


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As meaning says Split means breaking down big into smaller. In stock market terminology it means to split a stock, for Example Reliance industry decide to split it share in 10:1 means a stock holder who have 1 share of the the reliance industry will get 10 shares. But there is a twist that total issued capital of share will be the same. Lets consider an example.
Before Split -
Par Value of the Reliance Industry = 10
Number of share issue = 1000
Then Total Issued capital = 10 * 1000 = 10000

After Split 10:1 -
Par value of the Share = 10/10 = 1
Number of shares = 10 * 1000 = 10000
Total capital after split = 1 * 10000 = 10000

So you can see that total Capital is same before/After split.

Now the question comes why an company goes for the stock split: - Once a company feels that it share price has become so high that is it out of reach from an normal investor so to make the stock price lucrative company decide for the stock split to reduce the price of the share.

Reverse Split:- It is exactly opposite to the Split regarding the numbers. so 1:10 means stock holder will get 1 share for it 10 share.

Why company goes for the Revere Split- some time it happen that price of share become very low (Penny stocks) and normal investor think that share price is very low(Lucrative) and it will increase in the future and buy it without seeing the fundamentals of the company. and latter stock price will goes down because of the because of the fundamentals of the company was not good.

So the authority discourage the listing of the security which constantly trading at low price for the benefit of the investor and company has to go for the reverse split. It will increase the price of the share and decrease the outstanding share.