A reverse stock split is a form of corporate action that occurs when the board of directors of a firm agrees to replace a certain number of outstanding shares with a lesser number.

The reverse split can take many shares from investors and later replace those with fewer shares.

The reverse stock split boosts the share price and makes the company more attractive to potential investors. Usually, it is the last resort for companies in danger of being delisted from the stock market.

How Does a Reverse Stock Split Work?

Each outstanding corporation share is split into a fraction of a claim when it has been completed. In this process, a company reduces the number of its shares by offering new shares to current shareholders in a ratio that could be 5:1, 10:1, or even more. It depends on the company and how it wants to go.

If the company reveals the 1-for-10 reverse stock split, then every 10 shares you have will be converted into one or a single claim. So, you can say that before the reverse stock split, if you have about 10,000 shares, you will get 1000 shares or claims after the reverse stock split!

What Are the Benefits of a Reverse Stock Split?

There are a few benefits to this strategy, which are:

Prevent significant exchange removal: A share price may have fallen to record low levels, exposing it to more market pressure and other unfavorable events, such as failing to meet the exchange listing requirements.

Attract big investors: Businesses keep their share prices higher by reverse stock splits. Many mutual funds and institutional investors have rules against holding stakes in stocks whose price is below a minimum value.

Satisfy regulators: A company's regulation varies depending on the number of shareholders, among other things, in various jurisdictions throughout the world. Companies may try to minimize the number of shareholders to fall under the jurisdiction of their favored regulator or preferred set of laws by reducing the number of shares. Such actions may take place by companies seeking to go private to limit the number of shareholders.

There are a few benefits to this strategy, which are:

• Prevent significant exchange removal: A share price may have fallen to record low levels, exposing it to more market pressure and other unfavorable events, such as failing to meet the exchange listing requirements.
• Attract big investors: Businesses keep their share prices higher by reverse stock splits. Many mutual funds and institutional investors have rules against holding stakes in stocks whose price is below a minimum value. Even if the exchange does not delist the firm, its reputation suffers if it is not eligible for purchase by such large-sized investors.
• Satisfy regulators: A company's regulation varies depending on the number of shareholders, among other things, in various jurisdictions throughout the world. Companies may try to minimize the number of shareholders to fall under the jurisdiction of their favored regulator or preferred set of laws by reducing the number of shares. Such actions may also be taken by companies seeking to go private to limit the number of shareholders.
• Boost spinoff prices: Companies can use reverse splits to raise spinoff prices. A spinoff is an independent company formed by selling or distributing additional shares of a parent firm's existing business or division.

What Are the Drawbacks of a Reverse Stock Split?

Well, for one, it is considered a sign of weakness. When the company announces that it's doing a reverse stock split, it's because the stock is trading at a lower price while the company wants to raise its value.

Another downside is that it can lower the value of a company's stock. Because a reverse stock split makes each share worth more by decreasing the number of outstanding shares, when the company's shares are trading at a high price, doing a reverse stock split can cause the stock to decline in value.

Finally, some investors see reverse stock splits as a symbol that the company is in trouble and is not likely to invest in it.

How Can You Profit from a Reverse Stock Split?

When the company does a reverse stock split, it reduces the number of its outstanding shares. It has two effects: first, it increases the price of each claim (because there are fewer shares to divide the total value by). And second, it makes the company's debt and other obligations appear smaller on paper.

That's why a reverse stock split often seems like a desperate measure company does when they're in trouble and need to look more vital to investors. If you're holding shares in a company doing a reverse stock split, it might be time to bail out.

There are still some opportunities to make money off of reverse stock splits, but they're less lucrative than they used to be. You can still profit by shorting the stock or buying put options, but you need to act quickly because these positions usually don't last very long.

Ge's Reverse Stock Split: What you need to know

In a reverse stock split, the company decreases the figure of outstanding shares by sharing each share by a predetermined number. A reverse stock split often brings a company's share price back within regulatory limits or makes the company more attractive to potential investors.

GE completed a 1-for-8 reverse stock split on June 30. GE shareholders approved the division to help the company remain listed on the Dow Jones Industrial Average.

Now that GE's share price is within regulatory limits, it will no longer be a factor for investors deciding between GE and other industries.

Conclusion

A reverse stock split can happen for various reasons; a company might want to do a reverse stock split. Maybe its shares have been falling, and it wants to boost the price per share. Or perhaps it's in danger of being delisted from an exchange because it needs to meet listing requirements.

Whatever the reason, it's essential to know what's going on with your stock. If you're a shareholder in a company doing a reverse stock split, you'll receive new shares in proportion to your current holdings.

If you're holding shares in a company that does a reverse stock split, there's not much you need to do. The process is relatively straightforward, and your claims will be automatically regulated to reflect the new share count.