What Is a Reverse Stock Split, and What Does It Mean for Your Portfolio? | MagnifyMoney (2022)

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

Many are familiar with stock splits, where investors receive new shares of a company’s stock in proportion to their existing holdings, but less well-known are reverse stocks splits. Like a stock split (also called a forward stock split), a reverse stock split distributes new shares of stock to investors — but instead it effectively merges existing shares to reduce the number of shares that are publicly traded.

Here’s what a reverse stock split means for your stock, including why it can sometimes be a good thing.

  • What is a reverse stock split, and how does it work?
  • Reasons for a reverse stock split
  • Pros and cons of reverse stock splits for investors
  • How do stocks perform after a reverse split?
(Video) Stock Market Training: What is a Reverse Split?

What is a reverse stock split and how does it work?

In a reverse stock split, a company issues one new share in exchange for multiple shares of the old stock. For example, in a 1:4 reverse split, the company would provide one new share for every four old shares.

So if you owned 100 shares of a $10 stock and the company announced a 1:4 reverse split, you would own 25 shares trading at $40 per share. The total value of your position remains the same, with the number of shares and the stock price being adjusted by the split factor.

What’s the difference between a forward vs. a reverse stock split?

In a forward stock split, the company distributes new shares at some specified ratio. For example, in a 3:1 stock split, investors receive three new shares for every old share. Simultaneously, the stock price is divided by the split factor so that the company’s market capitalization remains the same. In a 3:1 split, the former stock price would be divided by three.

In other words, you get three times as many shares, but each share is worth one-third as much as before. It’s important to note that the total value of your stock does not rise with a stock split.

(Video) Reverse Stock Splits: Good or Bad for Shareholders? 🤔

So imagine you owned 100 shares of a stock trading at $120 per share. The company announces a 3:1 forward split. After the split, you would own 300 shares trading at $40 per share. Both before the split and after, the total value of your shares is $12,000.

A stock split is like slicing up a pizza. If it’s cut into four parts and you get a slice, that’s the same as a pizza cut into eight parts and getting two slices. Either way, you own one-fourth of the pie. Like the stock split, the only change is in the size of each slice — the price — and how many you get.

Reasons for a reverse stock split

While investors generally view forward stock splits favorably, the same can’t be said for reverse splits. That’s because reverse splits usually follow some kind of negative event in the company’s life that has seen the stock decline for months or years. The reverse split is often associated with bad news, although it’s not necessarily bad in and of itself.

“To me it comes down to if it exposes you more to concentration. Think to yourself, does this make sense to my overall portfolio? Be tactical in regards to trimming your portfolio quarterly to make sure you maintain a really good balance considering your risk and also avoid unintended taxation.” -Bryan P. Koepp, SVP Wealth Planning Executive, Regions Bank

(Video) Reverse Stock Splits - Let's Do The Math!

Here are several reasons why a company might undertake a reverse stock split, including a couple of positive reasons:

  • Avoid getting delisted from the exchange: If a company’s stock falls below $1 per share for an extended period of time, the exchange may delist it. To cure this deficiency, the company can conduct a reverse split, moving the stock price above the threshold.
  • Make the company appear more legitimate: Stocks under $5 per share are considered penny stocks. Penny stocks have a bad reputation, and that’s not what most legitimate companies want to have. A reverse split can boost the stock to a “respectable” price— this may in turn lead to increased attention from analysts and investors, who may see the company as more legitimate at the higher price.
  • Allow the stock more room to fall: Executives may be anticipating the stock to fall further due to the company’s poor operating performance, and a reverse split boosts the stock price, giving it more room to fall without going into penny stock territory.
  • Adjust the price during a spinoff: Sometimes a company spins off another wholly-owned company, but this new company may have a stock price that would be too low if it weren’t adjusted higher through a reverse split. By doing a reverse split, the stock gets back into a normal trading range and can make the company look investable.
  • Lower the costs for investors: For large institutional investors, buying more shares increases transaction costs substantially. With a reverse split, a company can make it cheaper for investors to own a sizable percentage of the company.

It’s important to note that the reverse split in and of itself doesn’t fix the problems that likely led to a stock’s decline — it’s simply a stock maneuver.

Pros and cons of reverse splits for investors

Pros of reverse stock splits

  • Keeps the stock listed on the exchange: As a stock declines, the management team may conduct a reverse split to keep the stock listed and trading on the exchange. If the exchange is threatening to delist the stock because of a low price, a reverse split cures this problem. By raising the stock price, a reverse split allows the stock “more room” to fall before it becomes problematic again.
  • Can help relieve selling pressure: A reverse split keeps the stock above a certain threshold — often $5 or $10 per share — below which some funds may not be able to hold the stock or buy more. Thus, a reverse split would allow these investors to remain as stockholders, avoiding further selling pressure.
  • Can be a sign a company is considering the needs of its shareholders: For example, the company may want to reduce transaction costs for investors, and reducing the share count offers a way for investors to own the same percentage of the company but with fewer shares. In positive situations such as this, the stock usually hasn’t plummeted and management clearly spells out why it’s doing the reverse split. A management team that tries to consider the needs of investors is likely a good investment.

Cons of reverse stock splits

  • Can be an indicator of poor performance: When a company undertakes a reverse split, its poor operational performance is already reflected in its declining stock. The reverse split doesn’t create a declining stock; it’s an effect, not a cause, of poor performance. Still, a reverse split is often a wake-up call to investors, who should ask themselves why they still own the stock and whether they may want to consider selling it.
  • Could signal sinking stock: From a cynical perspective, a reverse split may indicate that management thinks the stock will continue to fall rather than go back up. Management may boost the price so that the company doesn’t run into immediate trouble with the exchange or its shareholders.
(Video) Reverse Stock Splits Explained How Does It Affect The Stocks Price and Value To Shareholders

How do stocks perform after a reverse split?

Stocks tend to lag the market after a reverse split — that’s not surprising if a reverse split signals that management thinks the stock will continue to decline.

However, it’s worth repeating: A reverse split is an effect of poor performance, not a cause. The stock often has already been on a long downtrend, and the reverse split is just a gimmick to keep the stock on the exchange or in investors’ hands, not a real operational repair of the business.

For investors, stock splits generally should be seen as a nonevent since they don’t increase the value of an investor’s holdings. However, some research indicates that forward stock splits signal management’s confidence in a stock’s rise, while reverse stock splits signal the continued decline of the business. That being said, reverse splits rarely come out of the blue; they typically follow months, if not years, of declining stock prices.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.

(Video) 📊 What is a stock split and how does it affect your investments | The Dough 💲how

FAQs

Is a reverse split good for investors? ›

A reverse stock split itself shouldn't impact an investor—their overall investment value remains the same, even as stocks are consolidated at a higher price. But the reasons behind the reverse stock split are worth investigating, and the split itself has the potential to drive stock prices down.

What happens to my stocks during a reverse split? ›

Reverse stock splits work the same way as regular stock splits but in reverse. A reverse split takes multiple shares from investors and replaces them with fewer shares. The new share price is proportionally higher, leaving the total market value of the company unchanged.

Should I sell stock before a reverse split? ›

The main advantage of selling before the reverse stock split is that you don't have to wait around for it to happen. However, if you want to make more money by holding onto your shares until they've risen in value again (after they've been divided), you may want to sell after the reverse stock split instead.

Is it better to buy before or after a reverse split? ›

Each individual stock is now worth $5. If this company pays stock dividends, the dividend amount is also reduced due to the split. So, technically, there's no real advantage of buying shares either before or after the split.

Who benefits from a reverse stock split? ›

For example, in a one-for-ten (1:10) reverse split, shareholders receive one share of the company's new stock for every 10 shares that they owned. In other words, a shareholder who held 1,000 shares would end up with 100 shares after the reverse stock split was complete.

Do I lose money in a reverse split? ›

In some reverse stock splits, small shareholders are "cashed out" (receiving a proportionate amount of cash in lieu of partial shares) so that they no longer own the company's shares. Investors may lose money as a result of fluctuations in trading prices following reverse stock splits.

Does a reverse stock split hurt shareholders? ›

Initially, a reverse stock split does not hurt shareholders. Investors who have $1,000 invested in 100 shares of a stock now have $1,000 invested in fewer shares. This does not mean the price of the stock will not decline in the future; putting all or part of an investment in jeopardy.

Do Stocks Go Up After stock split? ›

While the number of shares owned changes after a stock split, the split itself does not change your investment value. For example, suppose you own 100 shares of a company trading at $200 per share, for a total value of $20,000.

What are the disadvantages of a stock split? ›

Greater volatility: One drawback to stock splits is that they tend to increase volatility. Many new investors may buy into the company seeking a short-term bargain, or they may be looking for a well-paying stock dividend.

What stocks will split in 2022? ›

Stock splits in 2022
CompanyStock Split RatioAnnouncement Date
Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG)20-for-1Feb. 1, 2022
Shopify (NYSE:SHOP)10-for-1April 11, 2022
DexCom (NASDAQ:DXCM)4-for-1March 25, 2022
Tesla (NASDAQ:TSLA)3-for-1Aug. 4, 2022
2 more rows

How long does a reverse stock split take? ›

A company announcing a split usually sets an effective date of 10–30 days after the announcement. All shareholders who own the stock the trading day before the ex-date will take part in the split. The shares might take another few days to settle. Ask your broker if you have questions about how they handle splits.

What is the difference between a stock split and a reverse stock split? ›

The key difference is that a stock split increases the number of shares outstanding while a reverse stock split reduces the number of shares outstanding. For both events, there is no impact to retained earnings or overall stockholders' equity.

What are the next stocks to split? ›

Upcoming Stock Splits Calendar
CompanyRatioAnnouncement Date
NBRV Nabriva Therapeutics1-259/16/2022
SYRS Syros Pharmaceuticals1-109/19/2022
ATXI Avenue Therapeutics1-159/23/2022
NLY Annaly Capital Management1-49/26/2022
11 more rows

What does a 20/1 stock split mean? ›

In a 20-1 stock split, every share of the company's stock will be split into 20 new shares, each of which would be worth one twentieth of the original share value.

What date will Google stock split 2022? ›

Google's parent company Alphabet is planning a stock split on Friday, July 15, 2022.

How do you make money on a reverse stock split? ›

If you own 50 shares of a company valued at $10 per share, your investment is worth $500. In a 1-for-5 reverse stock split, you would instead own 10 shares (divide the number of your shares by five) and the share price would increase to $50 per share (multiply the share price by five).

What is a reverse stock split 1 for 30? ›

Reverse stock split ratio or RSP is 1:30; original share price or OP is $2; Original Number of Shares or OS is 2400000. New price per-share or NP = OP X The number of shares consolidated = 2 X 30 = $60. New number of shares or NS = OS ÷ RSP = 2400000 × (1 ÷ 30) = 80000 shares.

What is a 1 for 8 reverse split? ›

At a ratio of 1-for-8, every 8 shares of GE common stock will be automatically combined into 1 share and the stock price is expected to initially increase proportionately. This will reduce the number of outstanding shares from ~8.8 billion shares to ~1.1 billion shares.

Is a stock split good for shareholders? ›

Stock splits can improve trading liquidity and make the stock seem more affordable. In a stock split the number of outstanding shares increases and the price per share decreases proportionately, while the market capitalization and the value of the company do not change.

What is a 1/15 stock split? ›

In a 1-for-15 reverse stock split, each 100 shares previously purchased is now 7 shares. This split will require some changes to how you continue the Snider Investment Method® in this position. You will need to make adjustments to your Snider Method recordkeeping. Make these changes. before next Trade Day.

What is a 3 for 1 reverse stock split? ›

For example, a 1-for-3 reverse split is one that replaces every three shares owned by a company's investors with a single share of stock. So, if you owned 30 shares of a company's stock before such a reverse split went into effect, you'd own 10 shares afterward.

How many times can a stock reverse split? ›

There are no formal limits on how many times a company can perform reverse stock splits, but there are practical limits. The company must maintain at least 500,000 outstanding shares to stay listed on the NASDAQ and 200,000 to stay on the NYSE. Each reverse split reduces the number of shares a company has.

What is a 1 for 4 reverse stock split? ›

For example, in a 1:4 reverse split, the company would provide one new share for every four old shares. So if you owned 100 shares of a $10 stock and the company announced a 1:4 reverse split, you would own 25 shares trading at $40 per share.

At what price do stocks usually split? ›

Stock splits can be effected in any number if ratios, but the most common are 2:1, 3:1, 3:2, 4:1, 5:1 and so on. In a 2:1 split, 100 pre-split shares held at $60 dollars each will become 200 at $30 each.

Is Amazon stock split 2022? ›

Amazon.com announced in March 2022 that its board had approved a 20-for-1 stock split. It's the first split of the retailer's stock since three splits in the late 1990s. Stock splits have no effect on the fundamentals of the company, but may indicate that executives are confident in the direction of the business.

What is the primary purpose of a stock split? ›

A stock split is a corporate action that companies take to increase the number of outstanding shares and decrease the value of each share. In other words, as a company's stock price increases, investors are rewarded with higher returns.

What are the pros and cons of a reverse stock split? ›

Bottom Line. A reverse stock split reduces the number of a company's outstanding shares and proportionally increases the share price. While a higher share price can help to boost a company's image, reverse splits are generally received by investors as a potential sign of fundamental weakness.

What is stock split simple words? ›

Definition: When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same. As the number of shares increases, price per share goes down.

What does a stock split mean for shareholders? ›

Stock splits divide a company's shares into more shares, which in turn lowers a share's price and increases the number of shares available. For existing shareholders of that company's stock, this means that they'll receive additional shares for every one share that they already hold.

Does a reverse stock split hurt shareholders? ›

A reverse stock split consolidates the number of existing shares of stock held by shareholders into fewer shares. A reverse stock split does not directly impact a company's value (only its stock price). It can signal a company in distress since it raises the value of otherwise low-priced shares.

What is the difference between a stock split and a reverse stock split? ›

Reverse stock split: What that means

With a forward stock split, a company increases the number of shares outstanding and lowers the price per share. With a reverse stock split, a company reduces the number of shares outstanding and boosts the share price.

What are the disadvantages of a stock split? ›

Greater volatility: One drawback to stock splits is that they tend to increase volatility. Many new investors may buy into the company seeking a short-term bargain, or they may be looking for a well-paying stock dividend.

How do reverse stock splits affect short sellers? ›

Stock splits do not affect short sellers in a material way. There are some changes that occur as the result of a split that can impact the short position. However, they don't affect the value of the short position. The biggest change that happens in the portfolio is the number of shares shorted and the price per share.

How do you make money on a reverse stock split? ›

If you own 50 shares of a company valued at $10 per share, your investment is worth $500. In a 1-for-5 reverse stock split, you would instead own 10 shares (divide the number of your shares by five) and the share price would increase to $50 per share (multiply the share price by five).

Do Stocks Go Up After stock split? ›

While the number of shares owned changes after a stock split, the split itself does not change your investment value. For example, suppose you own 100 shares of a company trading at $200 per share, for a total value of $20,000.

How long does a reverse stock split take? ›

A company announcing a split usually sets an effective date of 10–30 days after the announcement. All shareholders who own the stock the trading day before the ex-date will take part in the split. The shares might take another few days to settle. Ask your broker if you have questions about how they handle splits.

What stocks will split in 2022? ›

Stock splits in 2022
CompanyStock Split RatioAnnouncement Date
Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG)20-for-1Feb. 1, 2022
Shopify (NYSE:SHOP)10-for-1April 11, 2022
DexCom (NASDAQ:DXCM)4-for-1March 25, 2022
Tesla (NASDAQ:TSLA)3-for-1Aug. 4, 2022
2 more rows

Is a reverse split bullish? ›

Unlike forward stock splits, which investors generally see as bullish, reverse splits are often taken as a bearish signal and may spur further selling by investors.

What does a 1 for 4 reverse stock split mean? ›

For example, in a 1:4 reverse split, the company would provide one new share for every four old shares. So if you owned 100 shares of a $10 stock and the company announced a 1:4 reverse split, you would own 25 shares trading at $40 per share.

What are the pros and cons of a reverse stock split? ›

Bottom Line. A reverse stock split reduces the number of a company's outstanding shares and proportionally increases the share price. While a higher share price can help to boost a company's image, reverse splits are generally received by investors as a potential sign of fundamental weakness.

Is Amazon stock split 2022? ›

Amazon.com announced in March 2022 that its board had approved a 20-for-1 stock split. It's the first split of the retailer's stock since three splits in the late 1990s. Stock splits have no effect on the fundamentals of the company, but may indicate that executives are confident in the direction of the business.

What is stock split simple words? ›

Definition: When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same. As the number of shares increases, price per share goes down.

Videos

1. Why do companies split or reverse-split their stocks? 🤔
(The Sassy Investor)
2. Stock Splits & What They Mean for You
(The Independent Dollar)
3. What Is A Stock Split? (Stock Splits Explained)
(Marko - WhiteBoard Finance)
4. Stock Splits, Reverse Stock Splits, Stock Buybacks Explained
(Financial Fitness)
5. REVERSE STOCK SPLIT TRAP | Understanding The Price History of A Stock
(Investing With Boston Louie)
6. Reverse Stock Split 1830
(Accounting Instruction, Help, & How To)

Top Articles

Latest Posts

Article information

Author: Lakeisha Bayer VM

Last Updated: 01/04/2023

Views: 5403

Rating: 4.9 / 5 (49 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Lakeisha Bayer VM

Birthday: 1997-10-17

Address: Suite 835 34136 Adrian Mountains, Floydton, UT 81036

Phone: +3571527672278

Job: Manufacturing Agent

Hobby: Skimboarding, Photography, Roller skating, Knife making, Paintball, Embroidery, Gunsmithing

Introduction: My name is Lakeisha Bayer VM, I am a brainy, kind, enchanting, healthy, lovely, clean, witty person who loves writing and wants to share my knowledge and understanding with you.