What is a reverse split?

Answer 1

Reverse stock splits act in the opposite manner as a stock split.

Generally, when a stock price gets very high, the company decides to "split" the stock to make it more affordable. If a shareholder owned 100 shares and the stock is trading at 120 dollars a share, and the company declares a 3 for 1 split, then the shareholder will have 300 shares with a value of 40 dollars per share. Notice that nothing has really changed; the shareholder still has the same value of stock and the company has neither incresed nor decreased it's capitalization (no increase/decrease in shareholder equity).

Now then, for a REVERSE split, the opposite occurs. The stock is usually trading at a very small amount of money, say 3 dollars a share. If a shareholder owns 100 shares at 3 dollars a share, the company may decide to have a 4 for 1 reverse split. In which case, after the reverse split, the shareholder will own 20 shares valued at 12 dollars a share each. Once again, this does not change anything for the shareholder or the company.

Now, you may ask, why have a reverse split? Usually it is because some mutual fund managers and others with fiduciary investing responsibilities may have a charter or bylaws that prohibit them from owning stocks that are traded below a certain amount of money (say 6 dollars a share). These rules are made because most investment managers consider shares that trade at low values to be more risky (i.e. penny stocks), and therefore, not suitable for investment by larger mutual fund companies.

One other reason to have a reverse stock split is to drive-out some shareholders. If a company has numerous shareholders than own less than 50 shares of a stock, the company may have a reverse stock split of 5 to 1 and then demand that anyone (post reverse split) that owns less than 10 shares after the split will be sent a check for their stock value and must "tender" their stock. This is done to save on mailing annual and quarterly reports and try to save on other shareholder mailings.

Answer 2

I'll answer with an example. If you have 100 shares of XYZ stock, which is currently selling for $2/share and the company has a 1 for 10 reverse split, then you will now have 10 shares at $20/share. So you didn't lose or gain anything...HOWEVER, a company that has a rev split usually does so to meet a listing regulation, such as their stock price being too low to stay listed on, let's say the Nasdaq or NYSE. So typically, the stock is sucking wind and about to get de-listed. Bottom line...find a better stock to own (especially is you have a loss). You could end up holding a loser for years. Great companies don't have reverse splits.

Read William O'Neil's book How To Make Money In Stocks

Answer 3

reverse spilt also known as consolidation is the direct oppsosite of a stock spilt. Usually happens when the share price drop too low due to exhaust trading in the exchange. Consolidation allows the share price to increase but also lowers the no of outstanding shares.