A reverse stock split is a strategy that a company will use if it looks like their stock is worth too little. If stock becomes too devalued, then the company will call a reverse stock split and the number of overall shares will be decreased. However, the total dollar amount that the stock is worth will stay the same. Essentially, if you own shares of a company that declares a reverse stock split, you’ll end up with fewer stocks that are worth more per share.
Reverse stock splits are usually explained as a x-for-y stock split, with the new number of shares on the left. So, if it is a 1-for-3 stock split, then you’ll end up with one share for every three that you own. Each of these new shares will be worth three times what the original share price was. In some cases, the reverse stock split will happen with a larger number of shares being fed into one. When that happens, some stock holders might not have enough shares to get even one of the newly valued shares. In that case, it is common to give those shareholders the monetary value of their existing stock.
This is not usually a good sign for the company that has done it. In fact, this might be a signal to sell your stock unless you think that the company is going to start selling more stock, or post higher profits soon. Most corporations will reverse stock split in order to make their stock look like it is worth more. In reality, the company will not have changed at all.
There are two other, specific reasons why a company would want to increase the value of its stock. First of all, there are a lot of mutual funds that will not trade stock that is under a certain value per share. If the company can make its stock high enough for the mutual funds, then it is more likely that the shares will be traded. The second reason is that very low stock prices can also cause a company to be delisted from its stock exchange. Most companies will do this to avoid delisting.
You can tell if a stock is in the middle of a reverse stock split because a “D” will appear next to the company name on its stock ticker.