Final answer:
A reverse stock split results in a higher share price and investors owning fewer shares, without changing the overall value of the firm. It is similar to consolidating multiple shares into one. The process does not directly provide the company with any financial return, as it occurs after the initial public offering (IPO). Option 5 is correct.
Step-by-step explanation:
A reverse stock split results in a higher share price and an investor owning fewer shares. It does not change the overall value of the firm. A reverse stock split is when a company reduces its total number of shares outstanding by combining a specific number of existing shares into a single share.
For instance, in a 1-for-10 reverse split, every 10 shares of a company you own are combined into 1 new share, so if you previously owned 100 shares, after the reverse split, you would have 10 shares. The share price, in theory, would increase proportionally. The value of the company remains the same, as does the total value of your investment (excluding external market factors).
The analogy of purchasing a home highlights that in regular stock transactions, the firm does not receive a financial return from shares traded between investors.
Once a company has made an initial public offering (IPO), it does not benefit directly from subsequent stock trades. Those trading shares in the secondary market are buying and selling ownership stakes from each other, similar to a homeowner selling their property to another buyer rather than to the original builder.