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. Why would a company perform a reverse stock split?

    Understand what a reverse stock split entails, and learn what the common motivations are for a company to perform a reverse ... Read Answer >>
  2. How and why does a stock split?

    Learn why stock splits do not occur very often for individual stocks, and understand the impact of reverse stock splits on ... Read Answer >>
  3. How is a company's market capitalization affected by a reverse stock split?

    Find out about reverse stock splits, why a company would use a reverse stock split and how a company's market capitalization ... Read Answer >>
  4. How long does a stock that has done a reverse split keep the letter "D" at the end ...

    A reverse split is a corporate action whereby a company reduces the number of shares outstanding and increases the price ... Read Answer >>
Related Articles
  1. Investing

    Understanding Stock Splits

    We explain what they are, the thinking behind them as well as their results.
  2. Investing

    Berkshire's Stock Splits: Good Buy Or Goodbye?

    Warren Buffett's Berkshire Hathaway recently split its stock. Is this a sign to buy?
  3. Investing

    Understanding Stock Splits

    Find out how stock splits work and how they affect investors.
  4. Investing

    Don't Let Stock Prices Fool You

    Find out why a stock with a six-figure share price can still be a good value.
  5. Investing

    How To Profit From Stock Splits And Buybacks

    If stock splits and buybacks have been a bit of a mystery to you, you're not alone. Learn some great tips.
  6. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  7. Investing

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  8. Insights

    Amazon Hits $1000

    Amazon.com Inc. has hit $1000 per share, but don't expect CEO Jeff Bezos to approve a split.
  9. Investing

    If You Had Invested Right After Apple's IPO

    Learn about how much a $1,000 investment in shares of Apple Incorporated would be worth if you invested at its initial public offering price.
  10. Investing

    Should Chipotle Consider a Stock Split? (CMG)

    Learn why it might be good for Chipotle to enact a stock split. Discover why some investors are bearish on the company's prospects.
RELATED TERMS
  1. Reverse Stock Split

    A corporate action in which a company reduces the total number ...
  2. Reverse/Forward Stock Split

    A stock split strategy that includes the use of a reverse stock ...
  3. Closing Price

    The final price at which a security is traded on a given trading ...
  4. Split-Up

    A corporate action in which a single company splits into two ...
  5. Split Payroll

    A method a business may use to pay its employees who are on international ...
  6. Split Payment

    Split payment is a means by which payment for a single order ...
Hot Definitions
  1. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  2. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  5. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government ...
Trading Center