A reverse stock split is the opposite of a forward stock split. When a company executes a 2:1 forward stock split, a shareholder who owns 100 shares of a stock worth $10 per share would receive an additional 100 shares, for a total of 200 shares with a new share price of $5 per share. In this example, a stockholder's investment would remain $1000.

In contrast, a reverse stock split reduces the number of shares and increases share price proportionately. In a 2:1 reverse stock split, a shareholder who has 100 shares of stock worth $10 per share would only have 50 shares with a new share price of $20 per share.

Companies reverse split for different reasons. Larger companies may reverse split to avoid being delisted from a stock exchange due to not trading at the minimum required share price. Others typically may reverse split in order to move to a more prestigious stock exchange. A company's board of directors may declare a reverse stock split without shareholder approval. The rules vary by state and are determined by the state of incorporation.