Deep Dive: What Is a Reverse Stock Split — What It Means and What It Signals for Investors
When a company announces a reverse stock split, it is combining multiple existing shares into a single new share, reducing the total number of outstanding shares while proportionally increasing the per-share price. A 1-for-10 reverse split, for example, converts every 10 shares a shareholder owns into 1 share worth ten times the previous price. On paper, nothing changes — the company's total market capitalization stays the same, and each investor's percentage ownership remains identical. But reverse stock splits are rarely neutral events. They almost always happen for a reason, and that reason is usually not good news. Companies pursue reverse splits when their share price has fallen so low that they risk being delisted from a major exchange, or when management wants to shed the stigma of being a penny stock. For investors, a reverse split is a signal that demands closer examination — not of the mechanics, which are straightforward, but of the underlying business conditions that made the split necessary in the first place.