In finance, a reverse stock split or reverse split is a process by which shares of corporate stock are effectively merged to form a smaller number of proportionally more valuable shares.
A reverse stock split is also called a stock merge. The "reverse stock split" appellation is a reference to the more common
stock split
A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much.
A stock split causes a decrease of mark ...
in which shares are effectively divided to form a larger number of proportionally less valuable shares. New shares are typically issued in a simple ratio, e.g. 1 new share for 2 old shares, 3 for 4, etc. A reverse split is the opposite of a stock split.
Typically, the exchange temporarily adds a "D" to the end of a ticker symbol during a reverse stock split. Sometimes a company may concurrently change its name. This is known as a name change and consolidation (i.e. using a different ticker symbol for the new shares).
There is a
stigma attached to doing a reverse stock split, as it underscores the fact that shares have declined in value, so it is not common and may take a shareholder or board meeting for consent. Many
institutional investor
An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked co ...
s and
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s, for example, have rules against purchasing a stock whose price is below some minimum, perhaps US$5. A common reason for a reverse stock split is to satisfy a stock exchange's minimum share price.
A reverse stock split may be used to reduce the number of shareholders. If a company completes a reverse split in which 1 new share is issued for every 100 old shares, any investor holding fewer than 100 shares would simply receive a cash payment. If the number of shareholders drops, the company may be placed into a different
regulatory
Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
category and may be governed by different law—for example, in the U.S., whether a company is regulated by the
SEC depends in part on the number of shareholders.
From time to time, companies will issue a reverse split concurrently with a forward split, making a reverse/forward split. Note that in reverse/forward splits, the shareholder's old shares are erased, as they receive a