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Reverse Stock Split Definition

What Is a Recant Stock Split?

A reverse stock split is a type of corporate action that consolidates the number of existing interests of stock into fewer (higher-priced) shares. A reverse stock split divides the existing total quantity of apportions by a number such as five or ten, which would then be called a 1-for-5 or 1-for-10 reverse split, respectively. A declare null stock split is also known as a stock consolidation, stock merge, or share rollback and is the opposite of a stock split, where a portion is divided (split) into multiple parts.

Key Takeaways

  • A reverse stock split consolidates the number of existing shares of staple held by shareholders into fewer shares.
  • A reverse stock split does not directly impact a company’s value (exclusive its stock price).
  • It can signal a company in distress since it raises the value of otherwise low-priced shares.
  • Remaining appropriate and avoiding being delisted are the most common reasons for corporations to pursue this strategy.

Watch Now: How Does a Upset Stock Split Work?

Understanding Reverse Stock Splits

Depending on market developments and situations, companies can humble several actions at the corporate level that may impact their capital structure. One of these is a reverse stock split, whereby abiding shares of corporate stock are effectively merged to create a smaller number of proportionally more valuable shares. Since fellowships don’t create any value by decreasing the number of shares, the price per share increases proportionally.

Per-share price bumping is the immediate reason why companies opt for reverse stock splits, and the associated ratios may range from 1-for-2 to as high as 1-for-100. Upside down stock splits do not impact a corporation’s value, although they are usually a result of its stock having shed respectable value. The negative connotation associated with such an act is often self-defeating as the stock is subject to renewed selling require.

Reverse stock splits are proposed by company management and are subject to consent from the shareholders through their express rights.

Advantages and Disadvantages of Reverse Stock Splits

There are several reasons why a company may decide to reduce its enumerate of outstanding shares in the market, some of which are advantageous.


Prevent major exchange removal: A share evaluation may have tumbled to record low levels, which might make it vulnerable to further market pressure and other silly developments, such as a failure to fulfill the exchange listing requirements.

An exchange generally specifies a minimum bid price for a property to be listed. If the stock falls below this bid price and remains lower than that threshold level over and above a certain period, it risks being delisted from the exchange.

For example, Nasdaq may delist a stock that is regularly trading below $1 per share. Removal from a national-level exchange relegates the company’s shares to penny sell status, forcing them to list on the Over-the-Counter Bulletin Board (OTCBB) or the pink sheets. Once placed in these another marketplaces for low-value stocks, the shares become harder to buy and sell.

Attract big investors: Companies also maintain higher portion prices through reverse stock splits because many institutional investors and mutual funds have procedures against taking positions in a stock whose price is below a minimum value. Even if a company remains unoccupied of delisting risk by the exchange, its failure to qualify for purchase by such large-sized investors mars its trading liquidity and repute.

Satisfy regulators: In different jurisdictions across the globe, a company’s regulation depends upon the number of shareholders, amidst other factors. By reducing the number of shares, companies at times aim to lower the number of shareholders to come under the purview of their offered regulator or preferred set of laws. Companies that want to go private may also attempt to reduce the number of shareholders owing to such measures.

Boost spinoff prices: Companies planning to create and float a spinoff, an independent company created through the sale or distribution of new shares of an existing business or division of a parent company, might also use reverse splits to rally attractive prices.

For example, if shares of a company planning a spinoff are trading at lower levels, it may be difficult for it to price its spinoff public limited company shares at a higher price. This issue could potentially be remedied by reverse splitting the shares and increasing how much each of their dues trades for.


Generally, a reverse stock split is not perceived positively by market participants. It indicates that the stereotyped price has gone to the bottom and that the company management is attempting to inflate the prices artificially without any real trade proposition. Additionally, the liquidity may also take a toll with the number of shares getting reduced in the open buy.

Example of a Reverse Stock Split

Say a pharmaceutical company has ten million outstanding shares in the market, which are trading for $5 per part. As the share price is lower, the company management may wish to artificially inflate the per-share price.

They decide to go for the 1-for-5 disaster stock split, which essentially means merging five existing shares into one new share. Once the corporate manners exercise is over, the company will have 2 million new shares (10 million / 5), with each dole out now costing $25 each ($5 x 5).

The proportionate change in share price also supports the fact that the body has not created any real value simply by performing the reverse stock split. Its overall value, represented by market capitalization, in advance and after the corporate action should remain the same.

The previous market cap is the earlier number of total shares times the earlier expense per share, which is $50 million ($5 x 10 million). The market cap following the reverse merger is the new number of overall shares times the new price per share, which is also $50 million ($25 x 2 million).

The factor by which the partnership’s management decides to go for the reverse stock split becomes the multiple by which the market automatically adjusts the share payment.

Real-World Example

In April 2002, the largest communications company in the U.S., AT&T Inc. (T), performed a 1-for-5 reverse stock split, in conjunction with formulae of spinning off its cable TV division and merging it with Comcast Corp. (CMCSA). The corporate action was planned as AT&T feared that the spinoff could hint to a significant decline in its share price and could impact liquidity, business, and its ability to raise capital.

Other routine instances of reverse stock splits include many small, often non-profitable companies involved in research and unfolding (R&D), which do not have any profit-making or marketable product or service. In such cases, companies undergo this corporate power simply to maintain their listing on a premier stock exchange.

Why Would a Company Undergo a Reverse Stock Split?

Negate splits are usually done when the share price falls too low, putting it at risk for delisting from an exchange for not engagement certain minimum price requirements. Having a higher share price can also attract certain investors who inclination not consider penny stocks for their portfolios.

What Happens If I Own Shares That Undergo a Reverse Stock Split?

With a invert split, shareholders of record will see the number of shares they own be reduced, but also see the price of each share expand in a comparable manner. For instance, in a 1:10 reverse stock split, if you owned 1,000 shares that were swop at $5 just before the split, you would then own 100 shares at $50 each. Your broker wish handle this automatically, so there is nothing you need to do. A reverse split will not affect your taxes.

Are Verso Splits Good or Bad?

Many times reverse splits are viewed negatively, as they signal that a company’s percentage price has declined significantly, possibly putting it at risk of being delisted. The higher-priced shares following the split may also be mean attractive to certain retail investors who prefer stocks with lower sticker prices.

Why Does the ETN I Own Have so Numerous Reverse Splits?

Some exchange-traded products like exchange-traded notes (ETNs) naturally decay in value atop of time and must undergo reverse splits regularly, but these products are not intended to be held for longer than a few hours or epoches. This is because ETNs are technically debt instruments that hold derivatives on products like commodities or volatility-linked pacts and not the actual underlying assets.

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