Thursday, August 19, 2010

When is a Reverse Stock Spilt Used?

A reverse stock split can be used in a situation where a stock share is trading at very low price ranges for the company. Companies will use this to make their stock look more marketable on stock exchanges and more appealing for smaller investors.

Furthermore, a reverse stock split is an important accounting process by a corporation of issuing to each current shareholder in that company a smaller number of new shares in proportion to that shareholder's original shares that are subsequently canceled.  This can also be called a stock merge.

Important things to remember:

  1. With a share split, the number of shares increase by some factor, while  the par value per share decreases by the same factor, leaving the value of common shares unchanged (no journal entry is necessary). Basically, the investor is in the same position as before. 
  2. Share splits are performed so that the share price is in a ‘normal’ trading range 
  3. Generally, a reverse split is only used when the company's hare price is very low.

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