Andrew Leckey

November 09, 2008|By Andrew Leckey

Q: What does a reverse stock split mean, and why does a company do it?

R.P., via the Internet

A: In light of this year's drop in stock prices, more companies could be declaring reverse splits. They can be declared by a firm's board of directors without shareholder approval.

A reverse stock split doesn't increase the value of your holdings but reduces the number of shares and increases the share price proportionately.

For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price. It is the opposite of a stock split, in which a company increases its outstanding shares by a set multiple.

"Companies have reverse splits when their stock price gets low, since a higher price affects investor perception of that stock," said Sam Stovall, senior investment strategist with Standard & Poor's Corp. in New York. "But while the number of shares changes, the net market value does not change because the price changes along with it."

Firms might declare a reverse split to avoid being delisted if their stock falls below an exchange's minimum price requirements.

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