Reverse stock splits decrease the number of shares outstanding for a company. There is no change in equity or market value when a company splits its stock.

A reverse stock split is a decrease in the number of shares of stock outstanding without any change in shareholder’s equity or market value for the company at the time of the split. As outstanding shares decrease, each share’s value increases proportionately, so there is no effect on the company’s total net value with a reverse stock split.

For example, a one-for-ten reverse stock split would;

• reduce the number of shares outstanding and
• give every shareholder one share for every ten shares owned,
• while increasing the value of each share by a multiple of ten.

Reverse splits can be one-for-two, one-for-four, one-for-ten, or any proportion the board of directors chooses. Companies often use a reverse stock split after a significant decline in stock price because reverse splits increase the price per share of the company’s stock, making the stock appear more attractive to potential investors.

Consider a shareholder with 10 shares of XYZ stock at $5 per share for a total market value of $50. If company XYZ announces a one-for-ten reverse stock split, the shareholder would now have 1 share of XYZ stock worth $50.