What is a reverse split?
It is a corporate manoeuvre in which a company reduces the number of shares in issue by exchanging new, high-value shares for existing stock of lower value. The reverse split does not affect the total value of the company or the value of individual holdings.
Where have you heard about reverse splits?
As an investor, you may have been put on notice that a reverse split is being proposed by a company whose shares you hold. Financial media report on reverse splits which are sometimes known as a stock consolidation.
What you need to know about reverse splits...
A reverse split involves a company swapping a smaller number of higher-value shares for a larger number of lower-value stock. The total worth of the company is unchanged. Reverse splits are usually undertaken in order to keep a company's share price above the minimum level needed to comply with the rules of the exchange on which they are traded. Another motive may be to "shake out" large numbers of smaller shareholders, who are costly to service. If the reverse split is one new share for 100 old ones, anyone holding less than 100 shares will be bought out. Furthermore, higher-value shares are harder to borrow for the purposes of short selling.