Reverse Stock Splits Explained

A reverse stock split is a corporate action that decreases the number of outstanding shares in a company. After a reverse stock split, the price of each share is increased but the value of the company remains the same. Stock consolidation or share rollback are other terms often used to describe a reverse stock split. A sample reverse stock split could be expressed as 1 for 2 or 1:2, meaning that you will own one share for every two of a particular stock you hold and the price per share will double.

Reverse stock splits should not be confused with forward stock splits, which are the opposite in that they are corporate actions that increase the number of outstanding shares a company has (and decrease the price) by issuing more shares to current shareholders.

Why do companies use reverse stock splits?

Companies may use a reverse stock split when the stock price falls below regulations to be listed on an exchange. For example, if a company's stock is trading at 85 cents per share and the requirements to be listed on the stock exchange specify that all stocks must be priced above $1.00, the corporation may choose to complete a reverse stock split to avoid being delisted from the exchange.

Another reason a company may complete a reverse stock split is that many mutual funds and institutional investors have rules against purchasing a stock with a price below a predefined minimum. If a company is looking to remain on the radar of large investors, they may increase the price of their shares to maintain the minimum threshold set by these institutions.

If a reverse stock split has taken place, when will my account reflect the shares I hold?

It may take up to five business days for the number of shares in your account to be adjusted to the new quantity.

Here's an example: You own 1000 shares of Company XYZ currently trading at 50 cents per share. This would mean that prior to a reverse stock split, the value of your shares is $500 (1000 shares x 50 cents per share).

Company XYZ undergoes a 1-for-2 reverse stock split. You check your holdings shortly after the execution date and see 1000 shares valued at $1.00 per share. It looks like you have doubled your investment, but this is not the case. The number of shares in your account will update within five business days to reflect the new number of shares you hold and the price per share (500 shares x $1.00 per share). The value of your holdings remains the same at $500.

To learn more, check out What is a Stock Split? in our Investing Academy.