What is a Reverse Stock Split? Everything You Need To Know

2025-09-15

What is a reverse stock split? To many investors, this can sound technical and even worrying. A reverse stock split is not about changing the company’s size or value, but about restructuring how its shares are counted and priced.

Companies often use this financial tool to stay listed on major exchanges or to make their stock more appealing to certain investors. Still, the announcement usually sparks debate, because while it may keep a company in compliance with stock exchange rules, it does not fix underlying business problems.

Understanding what a reverse stock split is and why companies use it can help investors make better decisions in the world of stocks and finance.

Reverse Stock Split Explained

Reverse Stock Split

A reverse stock split is a corporate action where a company reduces the number of its outstanding shares and increases the price of each share proportionally.

For example, in a 1-for-10 reverse stock split, every 10 existing shares are combined into one new share. If the stock was trading at 50 cents before, it would likely trade at around $5 afterward.

This action is the opposite of a stock split, where each share is divided into multiple new shares at a lower price. Importantly, a reverse stock split does not change the company’s overall value or its total market capitalization. Instead, it adjusts how the stock is structured and presented to the market.

How a Reverse Stock Split Works

When a company announces a reverse stock split, shareholders automatically see their number of shares reduced while the price of each share increases in equal proportion.

The process is managed through the exchange and the investor’s brokerage account, requiring no action from shareholders.

For instance, imagine a company declares a 1-for-5 reverse stock split. If you owned 1,000 shares worth $2 each, your holdings would change to 200 shares priced at $10 each. The total value remains the same at $2,000.

Reverse stock splits are often carried out when a company’s stock price has fallen too low. Major exchanges like the New York Stock Exchange (NYSE) and Nasdaq require listed companies to maintain a minimum price of $1 per share.

If the stock trades below that level for too long, the company risks being delisted. A reverse stock split can help avoid this.

Advantages and Disadvantages

Advantages

Maintain exchange listing: A reverse stock split can help a company keep its shares above the minimum price required to stay listed on the NYSE or Nasdaq.
Attract institutional investors: Many large investors, such as mutual funds, avoid buying stocks priced too low. By raising the share price, companies may make their stocks more appealing.
Support spinoffs or restructuring: If a company plans to spin off a new business unit, a higher share price can help with pricing the new shares at attractive levels.
Regulatory benefits: In some regions, reducing the number of shareholders through a reverse split can bring regulatory advantages, especially if the company wants to go private.

Disadvantages

Negative market perception: Investors often view a reverse stock split as a sign that a company is struggling, which may put further pressure on the stock price.
No real increase in value: The higher share price does not reflect new profits or stronger fundamentals. The company’s overall market capitalization stays the same.
Lower liquidity: With fewer shares available, trading activity may slow down, leading to wider spreads between buy and sell prices.
Investor caution: Retail investors may see the higher-priced shares as less affordable, which can reduce demand.

Real World Examples

Reverse stock splits are not rare. Some well-known companies have used them as part of their financial strategies.

AT&T (2002): AT&T carried out a 1-for-5 reverse stock split when it was spinning off its cable television business and merging it with Comcast. The move was designed to support its share price during a major transition.
Barnes & Noble Education (2024): This company completed a 1-for-100 reverse stock split, reducing outstanding shares from 2.62 billion to 26.2 million. The stock price jumped from $2 to $20, though it later fell sharply.
Smaller companies: Many research and development firms or companies with limited profits use reverse splits to avoid delisting. While it helps them stay on major exchanges, it often signals financial challenges.

Conclusion

A reverse stock split is a financial tool companies use to raise their share price without changing their overall value. While it can prevent delisting and attract bigger investors, it does not solve fundamental problems like weak earnings or slow growth.

Investors should view reverse stock splits as warning signs that a company may be facing difficulties, but also as a chance to look deeper into its long-term potential.

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FAQ

Is a reverse stock split ever good?

Yes, a reverse stock split can be good for an investor. It often increases a stock's daily price, which can attract more interest from professional investors. Companies often perform reverse splits to reduce the total number of shares available.

What is a reverse stock split?

A reverse stock split is the opposite of a regular stock split. A company reduces the total number of its shares to increase the price per share. The overall value of the company and your total investment remains the same; only the number of shares you own and the price of each share change.

Should I sell before a reverse stock split?

The decision to sell before a reverse split is complicated. A reverse split can sometimes make a stock more vulnerable to short selling, which could cause its price to fall further. Whether you are a buyer or a seller, it's difficult to find a clear winning position.

What happens to your money in a reverse stock split?

During a reverse stock split, the total value of your investment does not change. For example, if you own 50 shares of a company at $10 each, your investment is worth $500. After a reverse split, you might have fewer shares, but the value of each share would be higher, so your total investment would still be worth $500.

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Disclaimer: The content of this article does not constitute financial or investment advice.

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