How does a normal stock split work? Let’s take the example of Tesla’s stock split. The popular electric car manufacturer Tesla divided its share price and ownership as well. This meant that its previous sky-high price of $2,230 decreased to a more accessible price of $446. Shareholders who previously held just one share now owned five. Despite the stock split, Tesla still holds the same value.
Now, let’s understand how a reverse split works. For example, in a one-for-ten (1:10) reverse split, shareholders receive one share of the company’s new stock for every ten shares that they owned. If an investor owns 1,000 shares, each worth $1, before a one-for-ten reverse stock split, the investor would end up holding 100 shares worth $10 each after the split.
In general, reverse stock splits boost a company’s share price. A higher share price is usually seen as favorable, but the increase that comes from a reverse split is mostly an accounting trick. The value remains the same but is just distributed over fewer shares of stock, thus increasing the price.”