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?

RELATED FAQS

  1. I get multiple mailings to my house from companies that my spouse, children and I ...

    It's not uncommon for there to be more than one investment account holder in one household. If multiple members of your household ...
  2. What is the "percentage off the 52-week high or low"? How is this calculated?

    The "percentage off the 52-week high or low" refers to when a security's current price is relative to where it has traded ...
  3. How much more will it cost me to buy an odd lot of shares?

    A round lot is a predetermined number of shares of stock - usually 100 shares, while an odd lot refers to any number of shares ...
  4. What is the difference between a shareholder and a stakeholder?

    Shareholders are stakeholders in a corporation, but stakeholders are not always shareholders. A shareholder owns part of ...
RELATED TERMS
  1. Bidder

    The party offering to buy an asset from a seller at a specific ...
  2. Cash-And-Carry Trade

    A trading strategy in which an investor buys a long position ...
  3. Registration Right

    A right which entitles an investor who owns restricted stock ...
  4. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  6. Treasury Stock (Treasury Shares)

    The portion of shares that a company keeps in their own treasury. ...
comments powered by Disqus
Related Articles
  1. War's Influence On Wall Street
    Bonds & Fixed Income

    War's Influence On Wall Street

  2. The Basics Of Outstanding Shares And ...
    Investing Basics

    The Basics Of Outstanding Shares And ...

  3. How Your Vote Can Change Corporate Policy
    Investing

    How Your Vote Can Change Corporate Policy

  4. Narrow Your Range With Stop-Limit Orders
    Investing Basics

    Narrow Your Range With Stop-Limit Orders

  5. Evaluating The Board Of Directors
    Insurance

    Evaluating The Board Of Directors

Trading Center