A corporate action in which a company reduces the total number of its outstanding shares.

A reverse stock split involves the company dividing its current shares by a number such as 5 or 10, which would be called a 1-for-5 or 1-for split, respectively.

A reverse stock split is the opposite of a conventional forward stock split , which increases the number of shares outstanding. Similar to a forward stock split, the reverse split does not add any real value to the company. A reverse stock split is also known as a stock consolidation or share rollback. But in the real world, a stock that has undergone a reverse split may well come under renewed selling pressure.

Conversely, with a forward split, the stock may gain post-split because it is perceived as a success and its lower price might attract more investors.

The Hidden Danger of Reverse Stock Splits

In the vast majority of cases, a reverse split is undertaken to fulfill exchange listing requirements. An exchange generally specifies a minimum bid price for a stock to be listed.

If the stock falls below this bid price, it risks being delisted. However, during normal business times, a company whose stock price has declined precipitously over the years may have little choice but to undergo a reverse stock split to maintain its exchange listing.

Is a Reverse Stock Split Good or Bad? | Finance - Zacks

A secondary benefit of a reverse split is that by reducing the shares outstanding and share float, the stock becomes harder to borrow, making it difficult for short sellers to short the stock. The limited liquidity may also widen the bid-ask spread , which in turn deters trading and short selling.

The ratios associated with reverse splits are typically higher than those for forward splits, with some splits done on a 1-for, 1-for or even 1-for basis. Dictionary Term Of The Day.

Four Reasons for a Reverse Stock Split - gepahotalefi.web.fc2.com

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