Reverse Stock Split
Updated on March 16, 2023
Reverse stock split refers to a process where a company reduces the number of shares outstanding by a certain multiple. The share price thus increases in proportion to the said multiple. Reverse Stock split, as the name suggests, is the opposite of stock split. In a reverse stock split, the number of shares for the investor decreases, but the value remains the same.
For example, a reverse stock split of 2:1 would mean 1 share issuance for every 2 shares held by the investor.
The stock price will reflect this change while the market capitalization of the company will remain the same. Thus, a reverse stock split will have no impact on shareholder value.
Why is a Reverse Stock Split important?
Reverse stock splits are not very common, but can be carried for various purposes, like:
a. It can help in attracting big, institutional investors who otherwise avoid such stocks
b. It helps in avoiding delisting as a share price going down dangerously can trigger delisting process by either the Stock Exchange or investors
How does a Reverse Stock Split impact prices?
There is not much impact of a reverse stock split on the price of a stock other than the change in the number of shares. However, investors can monitor the performance of a stock closely after a reverse stock split is announced and then take a decision.