As the name suggests, in a reverse stock split, instead of lowering the price of each share, the price increases while the total number of outstanding shares decrease. This is also known as a share consolidation. A reverse split does not affect the total value or the market capitalisation of the stock.
A company may conduct a reverse stock split in order to increase their stock price. One reason may be to meet listing requirements or to raise interest in the stock due to higher prices. However, reverse stock splits are often viewed negatively as it might be seen as a sign of struggle to maintain financially.
Here is a simple example of a reverse stock split:
Company A has undergone a 1 for 5 reverse stock split, which means that shareholders have received one share of the new stock for every 5 shares that they previously owned.
If the shareholder had originally owned 5000 shares before the reverse stock split, they would now own 1000 shares after completion of the reverse split.
If the share price was originally US$1, which means that the shareholder had a total share value of US$5000, after the reverse split, they would still have a total share value of US$5000 with each share being worth US$5.