Reverse stock split

Reverse stock split

Reverse stock split

A reverse stock split or reverse split is the opposite of a stock split, i.e. a stock merge: a reduction in the number of shares and an accompanying increase in the share price. The ratio is also reversed: 1-for-2, 1-for-3 and so on.

There is a stigma attached to doing this so it is not initiated without very good reason. Many institutional investors and mutual funds, for example, have rules against purchasing a stock whose price is below some minimum, perhaps $5. An extreme case would be when a share price has dropped so low that it is in danger of being delisted from its stock exchange.

It is also possible that a reverse stock split could be used as a tactic to reduce the number of shareholders. In a hypothetical 1-for-100 reverse split any investor holding less than 100 shares would simply receive a cash payment and no shares of stock. If the resulting number of shareholders has then dropped below some threshold, it may be placed into a different regulatory category.

Typically, the stock will temporarily add a "D" to the end of its ticker during a reverse stock split.


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