What's a Reverse Stock Split?

Citigroup today announced that it's going to seek approval from shareholders for a reverse stock split on its common shares. So how does a split work, and what does it mean for shareholders? Here's a quick run-down:

According to the SEC, a reverse stock split reduces the number of shares outstanding, but increases the share prices proportionally.

Here's a quick example from Investopedia--which is a great resource if you're looking for a simple explanation of a complex financial term:

A 1-for-2 reverse split means you get half as many shares, but at twice the price. It's usually a bad sign if a company is forced to reverse split--firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being delisted.

In Citi's case, the company plans to dilute the holdings of common shareholders by converting preferred shares into common shares. In an SEC filing, Citi proposed seven exchange ratios, which range from 1-for-2 or 1-for-30. If the shares are converted, says Dow Jones, common shareholders will see their holdings diluted by nearly 75 percent. The company's shares (ticker: C) have fallen more than 50 percent this year, and recently traded around $1.

Citi shareholders might be interested in this piece, which explains why the split isn't a good thing.