What does a reverse stock split mean?

A reverse stock split is a corporate action that consolidates the number of existing shares of stock into fewer (higher-priced) shares. This is typically done to increase the per-share price of a stock that has experienced a significant decline in value, often as a result of distress or to meet exchange listing requirements. Here are some key points to understand about reverse stock splits:

1. Impact on Company Value: A reverse stock split does not directly impact a company's value; it only affects the stock price. The total market value of the company remains unchanged, as the number of shares outstanding is reduced proportionally.
2. Exchange Compliance: Many exchanges have minimum bid price requirements to maintain listing status. Companies may resort to reverse stock splits to increase their share price and avoid being delisted from these exchanges.
3. Investor Perception: Reverse stock splits are often viewed negatively by investors, as they can be seen as a sign of distress or a warning that the company is unable to increase its stock price through more positive means such as improved performance.
4. Trading Characteristics: Following a reverse stock split, trading characteristics can improve, including better liquidity, shorter queues, tighter spreads, and less dark trading. This is because the higher share price reduces the impact of minimum bid size requirements and makes the stock more attractive to institutional investors.
5. Historical Usage: Reverse stock splits have been used by companies in various situations, including to meet exchange listing requirements, attract institutional investors, lower transaction costs, and as part of corporate restructuring or spinoffs.

In conclusion, a reverse stock split is a tool that companies use to manipulate their stock structure and increase the price of their shares, typically in response to distress or to meet exchange listing requirements. While it does not change the company's value, it can impact investor perception and trading characteristics.