Definition of Reverse Stock Split

In a reverse stock split, the company consolidates its existing outstanding shares into a smaller number of shares. This technique is opposite to Stock split where a company divides 1 share into a greater number of shares.

Example of Reverse Stock Split:

A reverse stock split divides the existing number of shares into 5 or 10 reverse split or 1-for-5 or 1-for-10 reverse split. This simply means if you have 5 or 10 shares, they will be reverse split into 1 share only. If you have 1000 shares, after the 1-for-10 reverse split, you will be left with 100 shares of the company.

The reverse stock split decision is taken in a distress situation where stock price decreases drastically and to avoid delisting or embarrassment, the board of directors goes for the reverse stock split approach to increase the stock price of low-priced shares.