What Is a Reverse Stock Split? – Meaning, Example & Impact on Investors

Last Updated on July 7, 2025 7:19:06 PM by Vivek Makwana

A reverse stock split reduces your number of shares but increases the price. Learn what it means, how it works, and its impact on Indian investors.

✅ Reverse Stock Split Meaning

A Reverse Stock Split is when a company reduces the number of shares in the market but increases the price of each share. It’s like combining several small shares into one big share. Your total investment value stays the same. For example, if you had 10 shares worth Rs10 each, after a 1:5 reverse split, you will get 2 shares worth Rs50 each. The company does not give or take your money — it only changes the quantity and price per share. It is a mathematical adjustment, not an actual gain or loss.

Don’t worry – your total money invested stays the same. Only the number of shares you hold becomes less, and each share becomes costlier.

🔍 How Reverse Stock Split Works

Let’s say you have 10 shares of Rs10 each, so your total investment is Rs100.

Now the company announces a 1:5 Reverse Stock Split. That means 5 old shares = 1 new share.

So, your 10 shares will become 2 new shares, and the new price of each share will be Rs50.

Your total value is still Rs100. ✅

📊 Simple Example for Understanding

You didn’t lose or gain any money — just the quantity and price changed.

🧠 Why Companies Announce Reverse Stock Split ?

Companies do a reverse stock split mainly for these reasons:

1. 📉 Share Price Too Low – If the price becomes very low (like Rs1 or Rs2), it looks bad to big investors.
2. 📈 Attract Big Investors – High-priced shares attract long-term investors.
3. ✅ Stay Listed on Stock Exchanges – Some exchanges like NSE/BSE have rules that minimum price should be maintained.
4. 🧹 Clean Up Penny Stock Image – If share price is very low, people think it’s a junk stock. This process improves the image.

Companies usually announce a reverse stock split when their share price has fallen too low and they want to improve the company’s image in the stock market. A very low share price can make the stock look weak or like a penny stock. By reducing the number of shares and increasing the price per share, companies try to attract serious or institutional investors. Sometimes, they also do this to meet stock exchange rules and avoid getting delisted. But investors must always check whether this move is for a genuine reason or just to hide poor company performance.

🔍 Hidden Effects on Investors

A Reverse Stock Split may look like just a technical move, but it can have some hidden effects on investors. While the total value of your investment doesn’t change, the reduced number of shares may impact trading volume and liquidity. Small investors may also lose fractional shares and get cash instead. Sometimes, companies use reverse splits to hide poor stock performance or avoid delisting. This can create confusion or panic among retail investors. So, it’s important to check the reason behind the split. A reverse split is not always negative, but the hidden impacts must be carefully understood.

🔄 Reverse Stock Split vs Stock Split

Reverse Stock Split vs Face Value Change

Many investors confuse reverse stock split with a face value change, but both are different. In a reverse stock split, your number of shares reduces and price increases proportionally, but the face value remains the same or may change only slightly. On the other hand, when a company changes the face value (say from Rs10 to Rs2), it’s often part of a stock split, not reverse. Both changes impact how shares are traded, but a reverse split aims to increase price, while face value change affects share count. Always read the company notice carefully to understand the difference.

Should You Buy a Stock After Reverse Split?

Many investors feel tempted to buy a stock just because its price increased after a reverse stock split. But this is not always a good idea. The price has gone up only because the number of shares reduced — the company’s value didn’t increase. Before investing, check why the company did the reverse split. Is it financially strong? Is the business growing? Don’t invest blindly. Some stocks fall again after the reverse split if the company is weak. Always study the fundamentals, recent results, and news before buying any stock after such a move.

❓Is Reverse Stock Split Good or Bad?

It depends. 👇

👍 Good Sign if the company is doing this to improve its image, attract investors, or meet exchange rules.
👎 Bad Sign if the company is doing this because its stock price has crashed badly and it is trying to cover the problem.

A Reverse Stock Split may look like just a technical move, but it can have some hidden effects on investors. While the total value of your investment doesn’t change, the reduced number of shares may impact trading volume and liquidity. Small investors may also lose fractional shares and get cash instead. Sometimes, companies use reverse splits to hide poor stock performance or avoid delisting. This can create confusion or panic among retail investors. So, it’s important to check the reason behind the split. A reverse split is not always negative, but the hidden impacts must be carefully understood.

📅How Did You Know Upcoming Reverse Stock Split

🔍 1. Check Stock Exchange Websites

Visit these official websites regularly:

• NSE India
  Go to: Corporates > Corporate Actions > Record Dates or Ex-Dates
• BSE India
  Go to: Corporates > Announcements
  Use keywords like “reverse split”, “face value change”, or “stock consolidation”.

📰 2. Finance News Websites

Follow these news portals, they often report stock splits:

• Moneycontrol
• Economic Times Markets
• Mint
  Search “reverse stock split upcoming” or “face value change”.

📱 3. Use Stock Market Apps

Apps like:

• Zerodha (Kite)
• Groww
• Upstox
• Angel One
  often give notifications or corporate action alerts on your portfolio stocks.

📅 4. Follow Company Announcements

If you already hold shares in a company, track it on:

• NSE/BSE > Company Page > Announcements
• Look for terms like “Board Meeting”, “Face Value Adjustment”, “Split/Consolidation”.

📝 Final Thoughts

A Reverse Stock Split does not change the total value of your investment. It’s just a technical change to reduce share quantity and increase share price.

But always check why the company is doing it. If the company is financially strong and doing it for a good reason, then there is no need to worry.

🙋‍♂️ FAQs – Reverse Stock Split

Q1. Will I lose money in a reverse stock split?
👉 No. Your total investment value stays the same.

Q2. Will the price of share go up after reverse split?
👉 Yes, price goes up, but value remains unchanged.

Q3. Can I sell my shares after reverse stock split?
👉 Yes, once the split is done and shares are credited, you can sell.

Q4. Is reverse stock split a bad sign?
👉 Sometimes yes, sometimes no. Depends on company reason.

Q5. How do I get updated shares in my Demat?
👉 Shares are automatically updated by the company and reflected in your Demat within few days.

Q6. What happens to fractional shares?
👉 You may receive cash payment for fractions, depending on company rules.

Q7. Does this affect dividends?
👉 No, dividend is calculated per share basis. Total value remains balanced.

Q8. Do I need to apply for reverse split?
👉 No, it is done automatically by the company.

Q9. Can reverse stock split be reversed?
👉 Not usually. But companies may do regular stock splits later.

Q10. Where can I check company announcements?
👉 Visit nseindia.com or bseindia.com.