Question

Which of the following descriptions corresponds best with a consolidation?

		Also known as a reverse split
		Share price changes
		The investor returns their holding to the issuer with a subscription payment for the new shares
		The original security is exchanged for new securities

Answer 1

Solution:-

Options 1

Reverse split is a tool that companies can use wherein they can increase the value per share by reducing the number of shares in circulation. So if an investor held 100 shares of $10 each, after a reverse split of 1:2, he would hold 50 shares of $20 each. It is done when the stock price of a company is at very low levels in absolute terms (e.g. $5 per share) which attracts speculative interest of traders and retail investors for just speculative purposes.

Since, reverse split has nothing to do with consolidation, this option is not correct.

Options 2

'Consolidation' is a widely used word in reference to share price changes. It is used to refer to a situation wherein the stock price strongly moved in either direction (up or down) in a recent move and is now moving sideways to consolidate the position of strength or weakness it gained in the preceding move. It means that the stock price is taking a breather at the moment and will continue its move in the direction of the preceding movement.

So, they commonly say that the share price has gone up 50% in last 3 months is now consolidating its position by taking a breather.

Therefore, as described, share price changes is linked to consolidation and hence this option is correct.

Options 3

'Consolidation' word is no way linked to investors returning holdings to issuers and paying subscription for new shares, hence this option is not correct.

Options 4

'Consolidation' word is no way linked to original securities getting exchanged for new securities, hence this option is not correct.