Reverse Stock Split

What Is a Reverse Stock Split?

A reverse stock split is the opposite of a stock split. Instead of increasing the number of shares, the company combines several existing shares into one new share. In a 1-for-10 reverse split, for example, a shareholder who held 1,000 shares would hold 100 shares afterward, and each share would be worth roughly ten times as much as before. The split itself does not change the company's market capitalization, so each shareholder's percentage ownership stays the same.

Why Companies Do It

Companies most often pursue a reverse split to raise a share price that has fallen very low. Major exchanges such as Nasdaq and the NYSE set minimum bid price standards for listed stocks. A company trading below the required level can receive a deficiency notice and may face delisting if it does not regain compliance. A higher share price can help with that requirement. Some companies also use the split to reduce the share count before a financing or merger.

How It Works in Practice

Shareholdings do not always divide evenly by the split ratio. Leftover fractional shares are typically rounded or paid out in cash. The split generally requires approval from the company's board and shareholders, and brokers and the company's transfer agent update each account. The cost basis of an investor's position is usually adjusted so that its total value for tax purposes stays the same, although the rules can vary by situation.

Considerations for Investors

A reverse split does not change a company's underlying value on its own, but it is often viewed as a sign of financial strain, since struggling companies frequently use it. Share prices have often fallen further in the period after a reverse split, though this is not guaranteed. Because fewer shares are outstanding, trading liquidity can also decline. Reading the company's filings to understand why the split is taking place helps put it in context.