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  A reverse split is when a company chooses to reduce the number of stock shares in circulation by converting existing shares into a smaller quantity of shares, while keeping their overall value the same. For example, a 1 for 2 reverse split means that the investor ends up with half as many shares, but each is worth twice as much. If an investor owns 200 of a company's shares that are trading at a price of $3 each, and the company declares a 1 for 2 reverse split, the investor will end up with 100 shares each worth $6. The investor had $600 worth of stock before the reverse split, and still has $600 in stock afterward. The concept is easy enough to understand, but what should the investor do when it happens?
  
  

Do Your Research Again

• When a company announces a reverse stock split, there's a reason why, and many investors believe that the reason is rarely good. Often, a company's stock has lost so much value that it is trading in the price range of a "penny stock." Most companies don't want to be regarded as a cheap stock, so they do a reverse split to falsely elevate the price. Experienced investors know that share prices often fall after the reverse split takes place, but what is even more important is to reevaluate the company. If its stock has lost so much value that a reverse split was necessary, what is the long-term outlook?
  
  

Sell the Shares

• Reverse splits often signal a short- or long-term fundamental problem with a company. After doing extensive research, the investor might decide that selling the stock is the best option. It is important to note that a reverse stock split does not change the monetary value of the stock, so if the investor sells the stock soon after the reverse split, very little value should be gained or lost compared to the value before the reverse split. Note that any gains or losses from the original purchase are still present.
  
  

Do Nothing

• If the investor believes in the long-term viability of the company, it may be best to hold onto the shares. Often, when a reverse split takes place, shares continue to drop in price. If fundamental analysis still reveals a strong underlying company, this drop in price may actually mean that it's a good time to purchase more shares of the stock. Still, holding onto the shares could be a risky option, so be sure to perform a detailed analysis to back up this decision.