Reverse/Forward Stock Split

What Is a Reverse/Forward Stock Split?

A reverse/forward stock split is a stock split strategy used by companies to eliminate shareholders that hold fewer than a specified number of shares. A reverse/forward stock split uses a reverse stock split followed by a forward stock split.

How a Reverse/Forward Stock Split Works

A reverse split reduces the overall number of shares a shareholder owns, causing some shareholders who hold less than the minimum required by the split to be cashed out. The forward stock split increases the overall number of shares a shareholder owns. A reverse/forward stock split is usually used by companies to cash out shareholders who hold less than a specified amount of shares.

This strategy is believed to cut administrative costs by reducing the number of shareholders who require mailed proxies and other documents.

Key Takeaways

  • A reverse/forward stock split is a strategy used by companies to eliminate shareholders with less than a specified number of shares.
  • In a reverse/forward stock split, shareholders with less than the specified amount of stock are cashed out and the remaining shareholders are recapitalized.
  • This strategy cuts administrative costs by reducing the number of shareholders who require mailed proxies and other documents.

Example of a Reverse/Forward Stock Split

For example, if a company declares a reverse/forward stock split, it may start by exchanging one share for every 100 shares that the investor holds. Investors with less than 100 shares would not be able to complete the split and would, therefore, be cashed out. Then, the company would do a forward stock split of 100 shares for one share. This would effectively bring shareholders that were not cashed out to their original number of shares.

At the end of this process, the total number of shareholders would be reduced. All shareholders who started the process with less than 100 shares, and were cashed out, are no longer be shareholders at the end of the process.