This is where a block of shares is broken down into smaller units (shares) so that the number of ordinary shares increases and their respective par value decreases at the stock split factor.
Stock split is meant to make the shares of a company more affordable by low income investors and increase their liquidity in the market.
ABC Company has 1000 ordinary shares of Sh.20 par value and a split of 1:4 i.e one stock is split into 4. The par value is divided by 4.
1000 stocks x 4 = 4000 shares
par value = 40 = 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. E.g incase of 20,000 shares @ Shs.20 par, they can be consolidated into 10,000 shares of Shs.40 par. I.e. (20,000 x ½) = 10,000 and Sh.20 = x 2 = 40/=