Reverse Stock Split

AAA

DEFINITION of 'Reverse Stock Split'

A corporate action in which a company reduces the total number of its outstanding shares. A reverse stock split involves the company dividing its current shares by a number such as 5 or 10, which would be called a 1-for-5 or 1-for-10 split, respectively. A reverse stock split is the opposite of a conventional (forward) stock split, which increases the number of shares outstanding. Similar to a forward stock split, the reverse split does not add any real value to the company. But since the motivation for a reverse split is very different from that for a forward split, the stock’s price moves after a reverse and forward split may be quite divergent. A reverse stock split is also known as a stock consolidation or share rollback.

VIDEO

Loading the player...

BREAKING DOWN 'Reverse Stock Split'

If a company has 200 million shares outstanding and the shares are trading at 20 cents each, a 1-for-10 reverse split would reduce the number of shares to 20 million, while the shares should trade at about $2. Note that the company’s market capitalization pre-split and post-split should – theoretically at least – be unchanged at $40 million.

But in the real world, a stock that has undergone a reverse split may well come under renewed selling pressure. In the above instance, if the stock declines to a price of $1.80 after the reverse split, the company’s market cap would now be $36 million. Conversely, with a forward split, the stock may gain post-split because it is perceived as a success and its lower price might attract more investors.

In the vast majority of cases, a reverse split is undertaken to fulfill exchange listing requirements. An exchange generally specifies a minimum bid price for a stock to be listed. If the stock falls below this bid price, it risks being delisted. Exchanges temporarily suspend this minimum price requirement during uncertain times; for example, the NYSE and Nasdaq suspended the minimum $1 price requirement for stocks listed during the 2008-09 bear market. However, during normal business times, a company whose stock price has declined precipitously over the years may have little choice but to undergo a reverse stock split to maintain its exchange listing.

A secondary benefit of a reverse split is that by reducing the shares outstanding and share float, the stock becomes harder to borrow, making it difficult for short sellers to short the stock. The limited liquidity may also widen the bid-ask spread, which in turn deters trading and short selling.

The ratios associated with reverse splits are typically higher than those for forward splits, with some splits done on a 1-for-10, 1-for-50 or even 1-for-100 basis.

RELATED TERMS
  1. Record Date

    The cut-off date established by a company in order to determine ...
  2. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  3. Stock Split

    A corporate action in which a company divides its existing shares ...
  4. Reverse/Forward Stock Split

    A stock split strategy that includes the use of a reverse stock ...
  5. Corporate Action

    Any event that brings material change to a company and affects ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
Related Articles
  1. Stock Analysis

    Sarepta Therapeutics Made Investors Millionaires in 2 Years

    Find out how Sarepta Therapeutics made investors millionaires with its drug Eteplirsen and financially and operationally smart decisions.
  2. Investing Basics

    Understanding Stock Splits

    We explain what they are, the thinking behind them as well as their results.
  3. Investing Basics

    How To Profit From Stock Splits And Buybacks

    If stock splits and buybacks have been a bit of a mystery to you, you're not alone. Learn some great tips.
  4. Bonds & Fixed Income

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  5. Term

    What is a Preemptive Right?

    A preemptive right allows select shareholders to buy newly issued shares in their corporation before the general public.
  6. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  7. Investing Basics

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  8. Economics

    What Does Human Resources Do?

    Human resources (HR) is the department within a company that handles all matters relating to employment.
  9. Professionals

    8 Justifications For Sky-high CEO Salaries

    Why are CEO salaries so astronomically high? There may be more to the story than you think.
  10. Term

    What is a Feasibility Study?

    A feasibility study analyzes a company’s ability to complete a project.
RELATED FAQS
  1. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  2. How do you calculate a reverse split using Excel?

    A reverse stock split is a corporate action a company may take to meet exchange requirements. A reverse split reduces the ... Read Full Answer >>
  3. What is the effect of a reverse split on the stock's value?

    When a company executes a reverse stock split, the stock's value increases by the multiple by which the company is reduced. ... Read Full Answer >>
  4. How is a company's market capitalization affected by a reverse stock split?

    A company's market capitalization is theoretically unaffected by a reverse stock split. A reverse stock split is a corporate ... Read Full Answer >>
  5. What are the typical ratios for a reverse stock split?

    Common share swap ratios used in a reverse stock split are two-to-one, 10-to-one, 50-to-one and 100-to-one. There is no set ... Read Full Answer >>
  6. Why would you undertake a reverse split?

    Most reverse stock splits are undertaken by small, micro penny stocks that need to maintain the minimum price requirements ... Read Full Answer >>
  7. Why would a company perform a reverse stock split?

    A company performs a reverse stock split to increase its share price. The desire to increase the share price is usually driven ... Read Full Answer >>
  8. Are over-the-counter stocks different from other stocks?

    As of 2015, premiere stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq, have stringent listing requirements, ... Read Full Answer >>
  9. What happens to a stop order after a stock splits?

    A stop order, commonly referred to as a stop-loss order, is an order placed with a broker to sell a security when it reaches ... Read Full Answer >>
  10. I own options on a stock, and it's just announced a split. What happens to my options?

    When the underlying stock of your option splits or even begins issuing a stock dividend, the contract undergoes an adjustment ... Read Full Answer >>
  11. How long does a stock that has done a reverse split keep the letter "D" at the end ...

    A reverse split is a corporate action whereby a company reduces the number of shares outstanding and increases the price ... Read Full Answer >>
  12. What is a split-adjusted share price?

    If a company has undergone stock splits over its lifetime, comparing historical stock prices to those of the present day ... Read Full Answer >>
  13. What are reverse stock splits?

    A reverse stock split is a corporate action in which a company reduces the number of shares it has outstanding by a set multiple. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  2. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  3. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  4. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  6. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!