What are reverse stock splits?

By Chad Langager AAA
A:

A reverse stock split is a corporate action in which a company reduces the number of shares it has outstanding by a set multiple. This is the opposite of a stock split, in which a company increases its outstanding shares by a set multiple.

For example, if a company announces a reverse stock split of 1:100, this means that once the split occurs, investors will receive one share for every 100 shares they own. In other words, if the company has 100 million shares before the split, this number would be reduced to 1 million after the split. As in a regular stock split, a reverse split causes no actual change in the value of the company because the share price also changes. However, some investors can be cashed out of their positions if they hold a small number of shares. For example, if an investor holds 50 shares of a company that splits 1:100, that person would be left with only half a share, so the company would simply pay that investor the value of the 50 shares.

Reverse stock splits are often seen as negative corporate actions because they are a tactic used by companies that have seen their share prices fall into the $1 range and, therefore, run the risk of being delisted from stock exchanges that have minimum share price rules. For example, if a company is listed on the Nasdaq and its shares fall below $1, it runs the risk of being delisted; companies sometimes reverse split to increase share price, allowing them to continue to trade on a reputable stock exchange. (See The Dirt On Delisting.)

For more on this topic, read Understanding Stock Splits and What Are Corporate Actions?

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