Introduction
You’ll hear the term reverse stock split thrown around in the investing world — though many investors don’t fully understand what it means, why companies do it or how such an action might impact their holding. If you own shares of a company, or are thinking about buying some, then understanding this concept can help prevent you from getting surprised. This article will help define a reverse stock split, how it’s put into place, why companies might decide to use a reverse stock split, what it means for you as an investor and how current market movements and regulations have changed the way they’re used today.
💡 Tip: You can use the BestStock AI Stock Split History tool to explore detailed data about past stock splits and reverse splits across major companies — including ratio, date, and performance impact.
Definitions: What is a Reverse Stock Split?
A reverse stock split occurs when a business cuts the number of its shares outstanding but boosts the price per share by an equal factor. In short, you will have fewer shares after the split, but each share will be worth more, so that the total value of your investment stays roughly the same.
For instance, if a company declares a 1-for-10 reverse split, then a shareholder who previously owned 1,000 shares will now own 100. Had the stock been at, say, $1 a share prior to the split, it would trade for something like $10 a share afterwards. You still have $1,000 worth of value in this deal.
As the counterexample to a forward stock split, in which a company adds shares (say two-for-one) and adjusts the share price lower accordingly for market accessibility.
How It Works: The Process of Doing a Reverse Stock Split
Here’s how a reverse stock split generally plays out:
- Announcement — The board or management of the company decides on a split ratio (e.g. 1-for-10 or 1-for-20) and makes the decision publicly known.
- Approval — With the approval of shareholders (in some cases required under company bylaws or state law) or simply authorized by directors, if appropriate.
- Record date – On the applicable record date, every X number of old shares is exchanged (converted) into one new share. For example, in a 1-for-10 split, 10 old shares become one new share.
- Fractional Shares – Investors can end up with fractions of a share. Companies generally pay cash for these fractions or round them either up or down, based on their policy.
- Aftermath – The overall company’s market value does not change instantaneously. Shares out go down, price per share goes up, % of the pie is constant.
Example
Let's say for example ABC Corp trades at $2/share and has 10M shares, that means the market value of their outstanding equity is $20 million. The firm declares a 1-for-10 reverse split. Afterward, it’ll have 1 million shares trading at around $20 apiece, for a market cap that won’t have budged from its pre-I.P.O. value of $20 million. If you owned 1,000 shares before, you now own 100 shares at approximately $20 a pop — total still winds up being $2,000.
Why Companies Do Reverse Stock Splits
Here’s why companies do reverse stock splits, and how it benefits them:
- Minimum price requirement – Exchanges such as NASDAQ and NYSE demand minimum share prices of listed companies, typically $1. A reverse split allows a company to give its stock price a lift in order to remain compliant.
- Better market perception – Stocks that are extremely low-priced are generally considered to be risky or “penny stocks.” Increasing the share price can also lift a company’s public profile and bring in more serious investors.
- Institutional investor appeal — There are funds or indexes that skip stocks trading under a certain price. Raising the share price could make a company more attractive to individual or institutional investors with deeper pockets.
- Streamlining the shareholder base – A high-ratio reverse split (say, 1-for-100) helps eliminate small fractional shareholders and simplifies record-keeping while cutting costs.
- Corporate actions preparation — Some companies may undergo a reverse split ahead of a merger, restructure or recapitalize in order to have monies and capitalization more clear.
What It Means for Investors: The Pros and Cons
The Upside
- The split alone doesn’t decrease the value of your investment; your percentage ownership remains the same.
- Done as part of a real comeback strategy, a reverse split can help inspire confidence, bring in big funds and make the company more attractive.
The Risks
- Reverse splits are often a sign that a company is in trouble. It can be a temporary solution for an underlying issue such as declining revenues or potential delisting.
- Reduced liquidity is another risk. Fewer shares traded and a greater price can equate to wider bid-ask spreads and more volatility.
- It can be a cosmetic action with no real change in business fundamentals, and the stock may continue to fall after the split.
- Dividend adjustments are possible: The amount of dividend per share can be altered, but your overall dividend should remain constant if the aggregate cash dividends do so.
Example: AMC’s 1-for-10 Reverse Stock Split Case
A notable real-world example of a 1-for-10 reverse stock split occurred with AMC Entertainment Holdings. Explore AMC’s split history →
In 2023, AMC executed a 1-for-10 reverse stock split as part of a larger plan to restructure its equity and address severe capital constraints. The company had run out of authorized common shares, preventing it from raising new funds through stock issuance. Although AMC tried to amend its corporate charter to authorize more shares, the proposal repeatedly failed — largely because most shareholders didn’t vote. At AMC’s 2022 annual meeting, only about 28% of shareholders participated, and charter amendments require majority approval from all shareholders, meaning that non-votes effectively counted as “no” votes.
To navigate this limitation, AMC created a new security called AMC Preferred Equity units (APE). These units were technically preferred stock — not subject to AMC’s common share limit of 524 million — and were backed by authorization for 50 million preferred shares. Each APE unit represented 1/100 of a preferred share but carried the same economic rights as one AMC common share.
Despite their similar economic value, APE units traded at a significant discount to AMC common shares, reflecting investor uncertainty and dilution concerns. To simplify its complex capital structure, AMC later proposed converting all APE units into AMC common shares and then conducting a 1-for-10 reverse stock split.
After this process, AMC’s outstanding shares dropped from roughly 550 million to about 145 million, creating more room to issue new shares and raise capital. This strategic move allowed AMC to strengthen its balance sheet and reduce reliance on debt, which the company had been struggling to service.
Overall, the AMC case shows that a reverse stock split can serve as more than just a cosmetic price adjustment — it can be a critical financial tool for restoring investor confidence, simplifying share structures, and enabling future fundraising opportunities.
💡 Want to explore how different companies handle stock splits over time? Check out BestStock AI’s Stock Split History tool for detailed historical data and insights.
Latest Trends and Regulatory Changes
Stock exchanges in recent years have toughened rules on repeated or excessive reverse stock splits. Exchanges like the NYSE now impose restrictions on how often companies can employ reverse splits to avoid being delisted, without fixing their performance problems. That change now means that reverse splits today will be under more scrutiny.
Market data also indicates that while reverse splits do not alter the theoretical value of a company, many stocks keep heading lower after such moves if a company’s business conditions do not change. It signals the time for investors to take a closer look at the company’s fundamentals, NOT that they should be using it as an automatic buy or panic sell signal.
Summary
A reverse stock split decreases the number of shares in circulation, while increasing the price of each share; however, it has no effect on a company’s total value. Firms typically do it in order to fall into compliance with listing rules, or to make themselves more attractive to new investors, or to shore up perception. For investors, it is not necessarily a good or bad thing — but often indicates financial stress or attempts at restructuring.
Instead, when you see an announcement for a reverse split, view it as a signal to delve further into why the company feels compelled to take that step and what it implies about its long-term health. The best way to determine whether to stay invested is by understanding the context.