UK Accounting Glossary
A reverse split is a reduction in the number of shares outstanding accompanied by an equivalent increase in share price. A 1-for-3 reverse split, for example, means existing shareholders end up with one-third as many shares at three times the price per share.
Penny stocks are notorious for their propensity to reverse split. Many of them exist for the sole purpose of issuing and selling new shares. Once the price has fallen too low, the company may do a reverse split to raise the price and reduce the float. This allows them to repeat the process.
There are legitimate reasons for companies to reverse split. A reverse split may be necessary to maintain a minimum per-share price dictated by a stock exchange. Reverse splits may also be used by companies undergoing bankruptcy reorganization.
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This glossary post was last updated: 6th February 2020.