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. 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 ...
  2. How do you calculate shareholder equity?

    Find out more about shareholders' equity, what shareholders' equity measures and how to calculate a company's shareholders' ...
  3. What is the formula for calculating beta?

    Find out more about beta, what a stock's or portfolio's beta measures, and learn how to calculate a security's or portfolio's ...
  4. How are rights distributed in a rights offering?

    Learn about stock rights offerings that companies may make, and discover how the rights are distributed among the company's ...
RELATED TERMS
  1. Valium Picnic

    A market holiday or a slow trading day.
  2. Enterprise Investment Scheme (EIS)

    A UK program that helps smaller, riskier companies to raise capital ...
  3. Record Date

    The cut-off date established by a company in order to determine ...
  4. Dividend

    A distribution of a portion of a company's earnings, decided ...
  5. Einhorn Effect

    The sharp drop in a publicly traded company’s share price that ...
  6. Institutional Ownership

    The amount of a company’s available stock owned by mutual or ...

You May Also Like

Related Articles
  1. Investing Basics

    How and why does a stock split?

  2. Stock Analysis

    3 Stocks To Buy and Hold For the Rest ...

  3. Investing

    Top Reasons Stock Indices Could Be Biased

  4. Trading Strategies

    Why There's No Such Thing As A Stock ...

  5. Investing

    Why Do Companies Choose NASDAQ for Their ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!