Reverse Stock Split
A reverse stock split is a type of corporate action that consolidates the number of existing shares of stock into fewer (higher-priced) shares. A reverse stock split divides the existing total quantity of shares by a number such as five or ten, which would then be called a 1-for-5 or 1-for-10 reverse split, respectively. A reverse stock split is also known as a stock consolidation, stock merge, or share rollback and is the opposite of a stock split, where a share is divided (split) into multiple parts.
This action is typically undertaken when a company's stock price is low, to raise the stock price and meet certain exchange listing requirements.
Definition: A reverse stock split is a corporate action that consolidates existing shares into fewer (higher-priced) shares. In a reverse stock split, the total number of existing shares is divided by a number, such as five or ten, referred to as a 1-for-5 or 1-for-10 reverse split. Reverse stock splits are also known as share consolidation, share merge, or share rollback, and are the opposite of stock splits, which divide shares into multiple parts. This action is typically taken when a company's stock price is low to increase the price and meet certain exchange listing requirements.
Origin: The concept of reverse stock splits originated during the development of the stock market, particularly when companies needed to raise their stock prices to meet the minimum price requirements of exchanges. The earliest cases of reverse stock splits can be traced back to the early 20th century when companies took this measure to avoid delisting from exchanges.
Categories and Characteristics: Reverse stock splits can be categorized into two types: 1. Mandatory reverse splits: Companies must perform reverse splits to meet the minimum price requirements of exchanges. 2. Voluntary reverse splits: Companies voluntarily perform reverse splits for strategic reasons. The main characteristics of reverse stock splits include: increasing stock price, reducing the number of shares, potentially improving the company's image, but also possibly raising concerns about the company's financial health.
Specific Cases: 1. In 2011, Citigroup conducted a 1-for-10 reverse stock split, consolidating every 10 shares into 1 share, thereby raising the stock price from $4 to $40. This move helped Citigroup meet the New York Stock Exchange's minimum price requirement. 2. In 2018, General Electric announced a 1-for-8 reverse stock split to increase its stock price and improve its image, ultimately raising the stock price from $6 to $48.
Common Questions: 1. Will a reverse stock split affect my investment? A reverse stock split does not change the total value of your holdings but reduces the number of shares you own while increasing the price per share. 2. Why do companies perform reverse stock splits? Companies typically perform reverse splits when their stock price is low to increase the price and meet exchange listing requirements or improve the company's image.
