The stock consolidation that is carried out by a publicly traded company for the purpose of reducing the number of its outstanding shares. Companies generally resort to reverse splits when their stock prices are “depressed”. By nature, a reverse stock split is a prorata combination of all the outstanding shares of a class of stock into a lower amount of shares of the same class. The process will require an amendment to the articles of incorporation.

For example, if a company has 5 million shares outstanding, it may decide to consolidate these shares down by half (to 2.5 million shares outstanding). The process of consolidation will involve doubling the share price. If the share price prior to an intended reverse stock split is trading at $40, the total share value would be:

Pre-reverse split share value = 5 million × $40 = $200 million

In consolidating the shares outstanding, post-reverse split means that the the share price would need to be adjusted to reflect the real value of the company:

Post-reverse split share value = 2.5 million × $80 = $200 million

In this sense, a reverse stock split is the opposite of a stock split.