What is a reverse stock split, and how does it impact my investment?

A reverse stock split is when a company reduces the number of its shares but increases the price of each share. The total value of your investment remains the same. Companies do this to make their stock look stronger, especially if the price has dropped too low.

1. What is a Reverse Stock Split?

A reverse stock split is when a company merges multiple shares into one. This reduces the number of shares in the market but increases their price.

For example, in a 1-for-5 reverse stock split, if you had 10 shares of ₹20 each, they will turn into 2 shares of ₹100 each. The total value remains ₹200.

2. Why Do Companies Do a Reverse Stock Split?

Companies usually do a reverse stock split for these reasons:

• Increase Stock Price: If a stock price is too low, a company may raise it through a reverse split.
• Avoid Delisting: Some stock exchanges remove companies if their stock price is too low. A reverse split helps prevent this.
• Improve Reputation: A higher stock price can make the company look more stable and attract investors.
• Reduce Shares: Fewer shares in the market can help control stock price movement.

3. How Does a Reverse Stock Split Affect Your Investment?

A reverse stock split does not change the total value of your investment, but it affects the number of shares you own:

• Number of Shares: You will have fewer shares after the split.
• Share Price: Each share will have a higher price.
• Total Investment Value: The overall value remains the same.
• Liquidity Issues: Sometimes, trading volume decreases after a reverse split.

4. Is a Reverse Stock Split Good or Bad?

It depends on the company and its reason for the reverse split:

• Good Sign: If the company is financially strong and improving, a reverse split may attract more investors.
• Bad Sign: If a company is struggling and using a reverse split to stay listed, it could be risky.
• Investor Confidence: Sometimes, investors see reverse splits as a sign of weakness and sell their shares.

5. Conclusion

A reverse stock split changes the number of shares you own but not the total value of your investment. It is usually done to increase stock price and avoid delisting. Investors should check why the company is doing a reverse split before making any decisions.