Introduction

Imagine you own 10 shares of a company, and one day you wake up to find that you now own only 2 shares. Sounds concerning? Not necessarily. This is an example of a reverse stock split, a corporate action where a company reduces the number of shares in circulation while increasing the price per share proportionally. Unlike a regular stock split, which increases the number of shares and lowers the price, a reverse stock split consolidates shares without affecting the company’s overall market value.

Companies usually implement a reverse stock split to boost their share price, often to meet exchange listing requirements or improve investor perception.

What is a Stock Split?

Before diving deeper into reverse stock splits, let’s first understand what is a stock split. A stock split is when a company increases the number of shares outstanding by issuing additional shares to existing shareholders, reducing the share price proportionally. For example, in a 2-for-1 stock split, every shareholder gets an additional share for each one they own, and the price of each share is halved.

Types of Stock Splits:

• Forward Stock Split: Increases the number of shares and reduces the share price (e.g., 2-for-1, 3-for-1).
• Reverse Stock Split: Decreases the number of shares and increases the share price (e.g., 1-for-5, 1-for-10).

Companies use stock splits to make their shares more affordable, while reverse stock splits help maintain credibility by keeping stock prices at a reasonable level.

Understanding the Reverse Stock Split Formula

The formula to determine the new number of shares after a reverse stock splits are:

New Shares = Old Shares / Reverse Split Ratio

For example, in a 1-for-5 reverse stock splits, if you own 100 shares before the split, after the split, your shares will be:

100 ÷ 5 = 20 shares

However, the price per share will increase proportionally. If the stock was trading at ₹50 before the split, after the split, the new price would be:

₹50 × 5 = ₹250 per share

This means that while the number of shares decreases, the total value of holdings remains the same (excluding transaction costs or market fluctuations).

Reverse Stock Split Example

To understand this better, let’s look at an example.

Example: XYZ Ltd. Announces a 1-for-10 Reverse Stock Splits

• Before the split: 1,000 shares at ₹20 each = ₹20,000 total value
• After the split: 100 shares at ₹200 each = ₹20,000 total value

The company’s market capitalization remains unchanged, but the stock price appears more respectable.

Real-Life Examples:

Several companies in India and globally have used reverse stock splits to maintain exchange listings or improve stock perception. Some notable ones include:

• Suzlon Energy (India)
• Yes Bank (India)
• General Electric (USA)

Reverse splits are often seen in struggling companies trying to regain investor confidence.

Recent Stock Splits in India

For investors looking at stock splits, here’s a look at some recent stock splits in India:

• Tata Steel: 1:10 stock split
• HDFC Bank: 1:2 stock split
• Infosys: 1:5 stock split

These companies implemented forward stock splits to increase liquidity and make shares more affordable to retail investors.

Upcoming Stock Splits to Watch

Tracking upcoming stock splits is essential for investors. A split share list can usually be found in company announcements, stock exchange websites, or financial news portals.

Upcoming stock splits can signal bullish sentiment if a company is performing well. Investors can monitor:

• NSE and BSE corporate announcements
• Company investor relations pages
• Market news platforms like Moneycontrol, Economic Times, Bloomberg

Being aware of upcoming stock splits helps investors make informed trading decisions.

You may also want to know the Benefits of Margin Trading in Stock Market

Benefits of Stock Split vs Reverse Stock Split

Both types of stock splits serve different purposes:

Stock Split Benefits:

• Increases liquidity by making shares more affordable
• Attracts retail investors
• Boosts trading volume

Reverse Stock Split Drawbacks:

• Can signal financial trouble
• May reduce stock liquidity
• Investors may view it negatively

However, a reverse stock split can also help a company maintain its stock exchange listing and attract institutional investors.

Advantages of Stock Split Reverse

Although reverse stock splits are often seen as a red flag, they offer certain advantages:

Prevents Delisting: Companies must maintain a minimum stock price to stay listed on exchanges like NSE, BSE, or NYSE. A reverse stock split ensures compliance.

Attracts Institutional Investors: Many mutual funds and institutional investors avoid low-priced stocks. A higher share price post-split makes the stock more appealing.

Improves Perception: A stock trading at ₹500 looks more stable than one at ₹5, even if both belong to the same company.

However, if the company’s fundamentals remain weak, a reverse stock split will not solve underlying issues.

Conclusion

Stock splits whether forward or reverse do not change a company’s fundamentals but impact liquidity, perception, and investor sentiment.

For retail investors:

• A regular stock split can be an opportunity to buy into a growing company.
• A reverse stock split should be analyzed carefully does the company have a strong turnaround strategy, or is it just trying to stay afloat?

Final Thought: Always evaluate a company’s financial health and future potential before making investment decisions based on stock splits. Jainam Broking Ltd. provides expert insights and research-backed analysis to help investors navigate such corporate actions with confidence.

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