What is a Reverse Stock Split?

A reverse stock split is a corporate action where a company reduces the number of its outstanding shares, typically by consolidating multiple shares into a single share. In contrast to a traditional (forward) stock split where shareholders receive additional shares, in a reverse stock split, shareholders receive fewer shares than they previously held, but the value of each share increases proportionally. Reverse stock splits are often seen as a signal of financial distress or a lack of confidence in the company’s future prospects, as they are typically used to increase the stock price to meet exchange listing requirements or to avoid delisting.

Key Features of Reverse Stock Split:

• Reduction in Outstanding Shares: A reverse stock split reduces the number of outstanding shares of a company’s stock. Shareholders receive fewer shares than they previously held, but the value of each share increases proportionally.
• Increase in Stock Price: As a result of the reverse split, the price per share of the company’s stock increases proportionally based on the reverse split ratio.
• Ratio Determination: The company’s board of directors determines the ratio of the reverse stock split, such as 1-for-5, 1-for-10, or any other ratio. This ratio dictates how many existing shares will be consolidated into one new share.

The basic differences between a stock split and a reverse stock split lie in their direction and effect on share quantity and price. A stock split increases the number of outstanding shares while decreasing the price per share, achieved by dividing existing shares into multiples. Conversely, a reverse stock split decreases the number of outstanding shares by consolidating multiple shares into one, resulting in a proportionally higher price per share.