Reverse Stock Split Definition

What is the reverse stock split definition, and how can it affect your shares? Also, what can it mean to the future of the company?

When a company does a reverse stock split what they are doing is lessening the number of shares a company has and balancing it out by increasing the price of those shares.

For instance if you own 1,000 shares of company XYZ which is trading at $3 and the stock has a 10 for 1 stock split you now own 100 shares of XYZ trading at $30. The increased price balances everything out, so there is no need to worry about having fewer shares.

What does it mean?

When there is a stock reverse split it could mean that the company is increasing the price of their shares to look more attractive to investors. It may also mean that the company is in danger of being delisted from a major exchange.

When a company is listed on a major exchange such as the NASDAQ they get certain perks like a larger trading volume. But in order to stay listed in the exchange it must meet certain criteria one of which being price.

If the company’s price is too low then it is in danger of being delisted. By raising its price it offsets that danger. A company which is having a reverse split may be trying to cover up a falling stock.

Should You Be Worried?

Now that you know the reverse stock split definition you might be getting worried about how it affects your stock.

While a company that does a reverse stock split may have some weaknesses it does not mean that the company is going under or that their stock will go down. It could simply mean that they want less shares out there for one reason or another. It by itself does not mean the company is a bad investment and many investors will stay with a stock after a split as long as it still makes sense.

Even so it could be a time to be cautions a little. Taking some more time to investigate why a stock may have lowered their number of shares can give you some more insight on the company and may actually help you down the road.

Stock Reverse Split for Options

Options are also divided the same way. If you own 10 option contracts before a 10 for 1 split you now own 1 option contract at a much higher price. Everything that will not split may be settled in another way such as cash. Return from Reverse Stock Split definition to Stock Trading Terminology