Mechanics of reverse stock split

A reverse stock split is a corporate action that reduces the number of outstanding shares of a company by consolidating existing shares. This results in a higher stock price, but does not affect the total value of the company or the value of an investor's investment. Here's a breakdown of the mechanics:

1. **Share consolidation**: The company cancels its current outstanding shares and distributes new shares to shareholders in proportion to their existing holdings. For example, in a 1-for-10 reverse stock split, shareholders receive one new share for every 10 shares they owned.
2. **Increased stock price**: The new shares are issued at a higher price per share, as the total value of the company remains the same but the number of shares outstanding is reduced. This can make the stock appear more valuable and potentially improve its marketability.
3. **No change in market capitalization**: The total market capitalization of the company, which is calculated by multiplying the stock price by the number of outstanding shares, remains the same. This means that the value of each shareholder's investment does not change.
4. **Impact on trading**: The reverse stock split can improve the liquidity and tradability of the stock, as the higher price per share reduces the number of shares that need to be traded to execute a transaction.
5. **Investor perception**: Reverse stock splits are often viewed negatively by investors, as they can be seen as a sign of distress or a last resort by companies facing challenges. However, this perception is not necessarily indicative of the underlying business's value.

In summary, a reverse stock split involves consolidating shares, increasing the stock price, and maintaining the total value of the company and shareholder investments. The impact on trading and investor perception can vary, depending on the reasons behind the reverse stock split and the broader context of the company's situation.