Function

• A reverse stock split can be declared by a corporation's board of directors. The reverse split involves trading new shares for a number of old shares. The reverse split will have a ratio of old shares for new. A 2:1 reverse split would give one new share for two of the existing shares. A 10:1 reverse split would take 10 old shares for each new one. The reverse split reduces the number of shares outstanding by the amount the reverse. A company that had 10 million shares outstanding and declared a 10:1 reverse split would have a million shares outstanding after the reverse split.
  
  

Effects

• A reverse stock split does not change the total value of the company's shares. The price will be adjusted with the ratio of the reverse split. For example, if the shares are worth $1 before the 10:1 reverse split, each share will have a value of $10 after the split. An investor with a 1,000 of the $1 shares before the split will have 100 shares worth $10 each after the split and the value will still be $1,000.
  
  

Considerations

• A company declares a reverse stock split to increase the share price of the company stock. The reason for this action may be to meet stock market or stock index listing requirements. The company management may also want to get the share price above penny stock level to give the stock more visibility and credibility.
  
  

Misconceptions

• A reverse stock split does not increase or decrease the value of an investment in the company. Investors may see the higher share price in the paper or online and think their investment has increased in value. The increase in value will be accompanied by a corresponding decrease in the number of shares owned. Investors may not be aware of the reverse split until the see their actual account balance.
  
  

Warning

• A reverse stock split can be a sign of a company in financial trouble. Often, the reason a reverse split is necessary is because the share price sank. The reverse split results in an increase in the share price but does not change any of the fundamentals associated with the company. Reverse splits can cause more investors to look at a stock because of the sudden increase in share price. The knowledge that the increase was caused by a reverse stock split should cause investors to investigate the reason for the reverse split.