Reverse Stock Split

A reverse stock split is when a company takes corporate action to consolidate the number of existing shares. This reduces the number of shares and makes it more valuable. There are various reasons a business decides to reduce the number of existing shares, but it often indicates distress in the business.

In a reverse stock split, the number of existing shares is divided by a number like 4 or 6. This is called a reverse split such as 1 for 4 or 2 for 6. When a stock is divided into a lesser number, it is also called stock merge, stock consolidation, or even share rollback. A reverse stock split is the opposite of a stock split.

A business might choose to take significant actions that will affect its capital structure at the corporate level. The market situations and developments influence these decisions. A reverse stock split is one of them; the company merges shares to create more valuable proportional shares. The price per share increases after the reverse stock split; this is so because the company is not creating value by reducing the number of shares.

The main reason that businesses opt to do this is that doing so raises the price per share. The reverse stock split can be as high as 1 for 100 or as low as 1 for 2. This does not have an impact on the value of the business, even though this might cause a drop in the value of the stock. For a company to opt to conduct a reverse stock split, they need to get the shareholder’s consent through voting.