ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

What Is A Reverse Split Or Stock Consolidation?

Updated on July 27, 2017
Stephen Sinclair profile image

Stephen Sinclair is a Canadian freelance writer who has been publishing professionally for several years.

Wall Street in New York City.
Wall Street in New York City. | Source

What is a stock consolidation?

There are two terms used to describe a relatively common corporate action: the reverse split or stock consolidation. A stock consolidation reduces the number of shares outstanding by a factor known as a reverse-split, or consolidation, ratio. All other things being equal, the market price of a stock will increase by a directly proportionate amount, inverse to the consolidation ratio, following a stock consolidation.

An investor who owned 100 shares of a company that consolidated its stock on a 1/10 basis, would be left with 10 shares, presumably trading at a price about 10 times higher, though in reality, this is not always the case. Further, consolidations reduce the number of shares outstanding for a given company, giving a tighter share structure, something many investors find desirable. Despite this, as explained by Wall Street's Best Daily, many investors disparage companies who consolidate their shares.

Zacks notes the smoke and mirrors nature of stock consolidations, "A higher share price is usually good, but the increase that comes from a reverse split is mostly an accounting trick. The company isn't any more valuable than it was before the reverse split. Whatever value it has is just distributed over fewer shares of stock, thus increasing the price. So a reverse split can generally be taken as a bad sign for a company."

Profitless companies with penny stocks listed on exchanges like the TSX Venture Exchange, where $0.005 minimum tick increments are in place, that have traded close to zero, are faced with large bid-ask spreads. For example, an investor who buys a stock with a bid-ask spread of $0.045 to $0.050, and pays $0.050, is faced with a 10 percent loss if they wish to sell immediately, and a 20 percent loss if the bid moves down just one tick. The situation is even worse at $0.010 and $0.005, where investors face immediate 50 and 100 percent losses, simply by buying at the ask.

For investors who use stop losses to manage risk, as described by Investor's Business Daily, instant 10 percent and near instant 20 percent losses make it impossible to operate and illustrate why low-priced stocks might be best avoided.

Proper consolidation adjustments

A five-year chart for shares of Opawica Explorations showing proper consolidation adjustments, from Yahoo Finance.
A five-year chart for shares of Opawica Explorations showing proper consolidation adjustments, from Yahoo Finance. | Source

Missing consolidation adjustment?

A five-year chart for Opawica shares with an apparent missing consolidation adjustment, from Stockhouse.com.
A five-year chart for Opawica shares with an apparent missing consolidation adjustment, from Stockhouse.com. | Source

What is a consolidation adjustment?

What is a reverse-split adjustment? Stock chart providers adjust prices prior to stock consolidations to give investors who held shares before a true picture of what their investment would be worth. However, the reality of what stock charts depict can vary widely.

For example. Yahoo Finance reports that on December 24, 2013, Opawica Explorations, Inc. (TSXV: OPW) consolidated its shares on a 1/12 basis. BigCharts reports that the prior day, December 23, Opawica stock closed at $0.005, the lowest possible price on the TSX Venture Exchange.

On December 24, after the consolidation, Opawica stock closed at $0.045, representing a loss for investors who held through it. For investors to have broken even with the consolidation, the Opawica stock would have needed to have closed at $0.06. Instead, Opawica investors were faced with a further 25 percent loss, from the lowest possible price on the TSX Venture Exchange.

Perhaps most interesting is the difference in five-year stock charts for Opawica offered by Yahoo Finance and Stockhouse.com. The chart offered by Yahoo Finance shows the stock losing money through the consolidation: prices have been properly adjusted. The chart offered by Stockhouse shows the stock jumping significantly, by at least 400 percent, through the consolidation. It appears that the Stockhouse chart for Opawica Explorations shares is missing the December 2013 consolidation adjustment.

Could this simply be an error? This was the question that was raised by the Janaury 2017 report to Canada's Minster of Public Safety Ralph Goodale, as hosted with HubPages, which found close to 100 charts of stocks issued by Canadian companies with similar errors with both Stockhoue and BigCharts. It has been noted that charts with such errors lead to investors being misled and have a potential use as a tool by those actively seeking to deceive others.

© 2017 Stephen Sinclair

Comments

Submit a Comment

  • Angel Guzman profile image

    Angel Guzman 

    15 months ago from Joliet, Illinois

    I was so angry when National Bank of Greece did this but I understand. I have owned their stock for quite some time now 2,000 shares and glad I am finally in the black. I wouldn't mind owning more but it just makes me sad how capitalism does fuck people over.

working

This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

Show Details
Necessary
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
Features
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Marketing
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Statistics
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)