Reverse Stock Split

What is a Reverse Stock Split?

This is when a company's shares are consolidated into fewer shares. A 1-for-2 reverse split, for example, is when 1 new share is issued for every 2 shares. Larger consolidations are possible, for example 1 new share for every 10 issued shares would be a 1-for-10 reverse split.

A reverse stock split is the opposite of a stock split.

Even though there are fewer shares after the reverse split the total market value of the company remains unchanged. After a 1-for-2 reverse split, a company that had issued 10,000,000 shares that were previous valued at $10 each would now have 5,000,000 shares in issued valued at $20. Thus the company's market capitalization of $100 million would remain unchanged.

No real value has been added because of the reverse split although the common theory is that because the shares are now more expensive they will become attractive to an elite segment of the market that considers higher priced shares to be more desirable. For example, a reverse share split could move a company out of the penny stock category. Also, brokers will normally charge less commission for high priced shares which, in theory, should make them more marketable and attractive.

Reverse Stock Split is primarily an American term and in the London Stock Market it is more commonly known as a reverse scrip issue, reverse bonus issue, reverse capitalization issue or reverse free issue.