Reverse stock split

Definition

A reverse stock split reduces the number of a corporation’s outstanding shares while increasing the share price proportionally. It does not change the company's overall market capitalization or shareholder equity.

5 Must Know Facts For Your Next Test

1. A common reason for reverse stock splits is to increase a company's stock price to meet exchange listing requirements.
2. Reverse stock splits are often viewed negatively by investors as they can signal financial distress.
3. The process involves exchanging a set number of old shares for a smaller number of new shares, such as a 1-for-10 reverse split.
4. Reverse stock splits do not affect the total value of an investor's holdings; only the number of shares and their individual price changes.
5. Financial statements must be adjusted post-reverse split to reflect the new number of outstanding shares and per-share values.

Review Questions

• Why might a company perform a reverse stock split?
• How does a reverse stock split impact an investor's total value in the company?
• What adjustments are made to financial statements after a reverse stock split?

Related terms

Stock Split: A corporate action that increases the number of shares by issuing more shares to current shareholders proportionately, reducing the share price accordingly.

Market Capitalization: The total market value of a company's outstanding shares, calculated by multiplying the current share price by the total number of outstanding shares.

Shareholder Equity: The residual interest in the assets of a corporation after deducting liabilities, representing ownership interest held by shareholders.