Reverse Stock Split

Reverse stock split

A proportionate decrease in the number of shares, but not the total value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1-for-3 split would result in stockholders owning one share for every three shares owned before the split. After the reverse split, the firm's stock price is, in this example, three times the pre-reverse split price. A firm generally institutes a reverse split to boost its stock's market price. Some think this supposedly attracts investors.

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reverse stock split

A proportionate reduction in the shares of stock held by shareholders. For example, a one-for-four split would result in stockholders owning one share for every four shares owned prior to the split. A reverse stock split has no effect on a firm's financial and operational performance and is often designed only to boost the market price of the stock so it won't be delisted from trading on an exchange that imposes a minimum share price requirement. Also called split down. Compare split.

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Reverse Stock Split

The act of a publicly-traded company reducing the number of outstanding shares while maintaining the same market capitalization. In other words, a company engages in a reverse stock split in order to increase its share price. For example, a company with a share price of $1.50 may cut its number of shares in half so that the price goes to $3. Companies only conduct a reverse stock split if it desires to boost its share price when it is unable to do so by other means. Some companies consider reverse stock splits a last resort to avoid delisting from the exchange as the result of a share price that is too low.

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Reverse stock split. If a company's stock is trading at a low price, the company may decide to reduce the number of existing shares and increase their price by consolidating the shares.

For example, a 1-for-2 reverse stock split halves the number of existing shares and doubles the price. In that case, if you hold 100 shares of a stock selling at $5 a share, for a combined value of $500, in a 1-for-2 reverse stock split, you would own 50 shares valued at $10 a share, which would still give you a combined value of $500. Stocks may be reverse split 1-for-5, or 5-for-10, or in any ratio the company chooses.

Reverse splits are generally used to ensure that a stock will continue to meet listing requirements on the market where it is traded or to encourage purchases by institutional investors, who may not buy stocks priced below a specific point.

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Reverse Stock Split

What Does Reverse Stock Split Mean?

A reduction in the number of company shares outstanding, which results in an increase in the par value of its stock or its earnings per share; the market value of the total number of shares (market capitalization) remains the same.

Investopedia explains Reverse Stock Split

For example, a 1-for-2 reverse split means that a shareholder will get half as many shares but at twice the price. A company that is forced into a reverse split may be in trouble because firms sometimes do it to artificially inflate their stock's price. A company also may do a reverse split to meet exchange listing requirements and avoid being delisted.

Related Terms:
• Dilution
• Market Capitalization
• Outstanding Shares
• Record Date
• Stock Split