Reverse Split

Procedure whereby a corporation reduces the number of outstanding shares. The total market value of the shares remains the same after the reverse split, however, a share is worth more. A company, for example, executes a 1 for 2 split. An investor owning 1000 shares will deliver them to the issuer and they will receive half as many new shares–but the shares will have double the value of the original shares. Thus, the investor now has 500 shares with a value of $8, instead of 1000 at $4–that is, the investor shares are worth the same amount as before the split. Reverse splits may be used by corporations whose shares are selling at very low market prices. They believe that if the security’s price is raised, it will attract more investors.

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