Reverse Stock Splits, Definition

A reverse stock split reduces the number of shares and increases the share price proportionately. For example, if you own 10,000 shares of a company and it declares a one for ten reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no affect on the value of what shareholders own. Companies often split their stock when they believe the price of their stock is too low to attract investors to buy their stock. Some reverse stock splits cause small shareholders to be "cashed out" so that they no longer own the company’s shares.

A company’s board of directors may declare a reverse stock split without shareholder approval. Although the SEC has authority over a broad range of corporate activity, state corporate law and a company’s articles of incorporation and by-laws govern reverse stock splits.