What is Reverse Stock Split?

What is Reverse Stock Split?

A reverse stock split is when a company reduces the number of its outstanding shares while increasing the price per share proportionally. Unlike a regular (forward) stock split, a reverse split doesn’t change the total value of your investment—it just adjusts the number of shares and price per share.

​🔁 How a Reverse Stock Split Works:

Let’s say you own 1,000 shares of a company trading at $1/share:

  • Total value = 1,000 × $1 = $1,000

If the company does a 1-for-10 reverse split:

  • You now own 100 shares

  • Each share is worth $10

  • Total value = 100 × $10 = $1,000 (unchanged)

📉 Why Companies Do a Reverse Split:

  • Avoid delisting: To meet minimum stock price requirements (e.g., Nasdaq requires a stock to trade above $1).

  • Improve perception: A higher share price may appeal to institutional investors.

  • Clean up the cap table: Helps reduce the number of shareholders holding tiny amounts of stock.

⚠️ Things to Know:

  • Not a good sign: Reverse splits often occur when a stock has been underperforming.

  • No immediate gain/loss: The value of your investment stays the same at the time of the split.

Fractional shares: If you don’t end up with a whole number of shares, the company may cash you out for the leftover fraction.

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