What is a reverse stock split?

A reverse stock split is a corporate action in which a company reduces the number of its outstanding shares and increases the price of each remaining share. This devalues the company’s stock and can be beneficial for the company in certain situations. In California, a reverse stock split is regulated by the California Corporations Code, which outlines the steps companies must take during a split. The primary purpose of a reverse stock split is to reduce the number of outstanding shares and consequently increase the stock’s overall value. The exact result of a split depends on the ratio of the split—for instance, a 3-for-1 split means that each shareholder of the pre-split stock would own three times as much stock post-split, but at a decreased per-share price. This makes the stock more attractive to investors, as it becomes a larger ownership stake in a company at a comparatively inexpensive cost. Reverse stock splits can also be used to satisfy the minimum market capitalization requirements of NASDAQ or other stock exchanges. Companies with a capitalization below these requirements may complete a reverse stock split in order to increase their overall stock price and meet the minimums. Finally, a reverse stock split can be used to increase the liquidity of a stock. A stock with fewer outstanding shares may be more attractive to investors, since there are fewer shares to be traded and the price of each remaining share can be more easily managed and increased. This improved liquidity may also make the stock more attractive to investment firms or other types of investors.

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What is a reverse stock split?

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