A reverse split or reverse stock split is a strategy adopted by companies to reduce the number of outstanding shares by combining them together. If a company had a total of 3 million outstanding shares each of $ 5.00 and the company decides to reverse the stock split in a proportion of 2 for 1. This way the company’s total outstanding shares will be 1.5 million and each share’s price will boost up to $10.00.
The inherent feature of a reverse stock split is that the amount of equity does not change as a result. Rather the share price increase sends a signaling effect in the market about the instability of the company.
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