Posted on December 30, 2008 - by Martin Lee

Be Wary of Share Consolidation

Share consolidation is an exercise whereby the shares of existing shareholders are combined. For example, in a 10 to 1 consolidation, 10,000 shares that you own will become 1000 shares.

Even though the number of shares has been reduced, nothing has changed in terms of the percentage of shareholdings. Theoretically, the price of the shares should increase by the same multiple in which the share was consolidated.

For example, if the price of a share was trading at $0.10 and there’s a consolidation of 10 is to 1, it should trade at $1 after the consolidation exercise.

Recently, there had been a number of share consolidations. Chasen, whose share was trading at $0.005 to $0.01, did a 100 is to 1 consolidation. If the valuation remains unchanged (big if), the price should trade at $0.50 to $1 post consolidation.

Apparently, there were many shareholders who were not aware of this consolidation and happily sold their shares at $0.13-0.20 post consolidation. On the other side, directors and the company were buying up the shares, driving up the price to $0.30. Read more…

Related posts:

1. Trend Watch:Could this be the consolidation? $SPY $EWS
2. Musing over my options for noble
3. Valuation Expansion