A reverse stock split is when a company adjusts the number of shares they have available to artificially increase the price per share. Technically, the shareholders don’t lose or gain any money when this happens, but the company buys itself some time to rebound from an economic drop.

The easiest way to explain reverse stock splits is with an example. Let’s say you own 100 shares of Apple stock, each worth $10. (For the record, AAPL is nowhere near that cheap in real life.) Unfortunately, Apple is suddenly hit hard by the recession – nobody’s buying iThings anymore – and the price of their stock falls to $0.50.

Apple knows that if their stock price remains under $1 for 30 days, it may be delisted from the NYSE. So in order to increase the price per share, Apple asks for a 10 to 1 reverse stock split. Suddenly, instead of having 100 shares worth $0.50 each, you have 10 shares worth $5 each.

In order to get from $0.50 to $5, you have to multiply $0.50 by 10. Imagine smooshing 10 of your $0.50 shares into one big ball of shares. Instead of 10, you now have one. And that one is worth $5.

You haven’t lost a penny. But Apple has just saved itself from being delisted.

Tags: delist, economic turmoil, reverse stock split, shareholder, shares