General Securities Representative (Series 7) Practice Exam – Your All-in-One Guide to Exam Success!

A reverse stock split is a corporate action where a company reduces the number of its outstanding shares while simultaneously increasing the share price proportionally. This process can help bolster the stock's price by consolidating the number of shares that investors hold. For instance, if a company performs a 1-for-10 reverse split, shareholders will receive one share for every ten shares they previously owned. As a result, while the number of shares decreases, the overall value of each shareholder's investment remains the same initially because the price per share increases by the same ratio.

The primary motive behind a reverse stock split often includes improving the company's image by boosting the stock price, potentially making it more attractive to institutional investors or enabling it to meet listing requirements for stock exchanges. In essence, by reducing the number of shares and increasing the price, the company's market capitalization—the total market value of its outstanding shares—does not change immediately due to this adjustment.

This understanding clarifies that a reverse stock split does not lead to a decrease in market capitalization, nor does it involve issuing new shares at a higher price or providing additional shares for lower-priced stocks. Instead, it is specifically about reducing the number of shares while increasing the stock price proportionally.