Share Consolidation — Meaning, Purpose & Best Example 2021
Corporate actions always create a buzz for stocks in the stock market. However, it can be good or bad depending upon how Mr. Market reacts to it. Share consolidation is also one of them, let’s discuss it in detail with examples and other related factors.
Share Consolidation
A corporate action in which a firm reduces the number of stocks traded on the stock exchange is known as share consolidation. Share consolidation is the opposite of a stock split, where a share is divided (split) into several parts.
It is also called reverse stock split, stock merge, or share rollback. Consolidation of shares occurs when a firm reduces the number of shares held by current shareholders.
Things to Keep in might regarding Share consolidation
- When a business consolidates after a capital reduction, the company ‘s valuation suffers.
- Before a stock consolidation, a firm will tell you by email, just like any other corporate activity.
- Since it enhances the value of otherwise low-priced shares, it can suggest a company in crisis.
- The most typical motivations for companies to follow this approach are to stay relevant and avoid being delisted.
Example
Here is the examples to understand reverse stock split in a better way:
If you have 5,000 stocks of XYZ firm, a 10:1 share consolidation means that each of your ten shares will be reduced to one. As a result, your 5,000 shares will be decreased to 500.
When shares are consolidated, the number of shares issued decreases, but the price per share rises, preserving the value of your investment.
Real World Example
Let’s take an example of Arnold holdings. They did share consolidation in march 2020 & increased the face value from 2 to 10 per share. It means for every 5 stocks which investors were holding before reverse stock split will get 1 share.
If you were holding 2,000 stocks then you will get only 400 stocks after the reverse stock split. However, the value to your investment will not decrease by this as the value of your 400 stocks will be the same as the value of your 2,000 shares before the stock merge.
Originally published at https://profitmust.com on December 8, 2021.
