Stock Split and Reverse Split
This is whereas a block of shares is broken down into smaller units or shares hence the number of ordinary shares rises and their respective par value reduce at the stock split factor. Stock split is meant to make the shares of a company more affordable through low income investors and increase their liquidity in the market.
Illustration
ABC Company has 1000 ordinary shares of Sh.20 par value and a split of 1:4 that is one stock is split into 4. The par value is divided via 4.
1000 stocks x 4 = 4000 shares
par value = 40/5
= Sh.5
Ordinary share capital = 4000 x 5 = Shs.20,000
A reverse split is the opposite of stock split and involves consolidation of shares into bigger units thereby increasing the par value of the shares. It is meant to attract high income clientele shareholders. As like incase of 20,000 shares @ Shs.20 par, they can be consolidated into 10,000 shares of Shs.40 par. That is (20,000 x ½) = 10,000 and Sh.20 = x 2 = 40/=