Reverse stock split
Also called: reverse split, share consolidation, stock consolidation
A corporate action that combines a set number of existing shares into one share, cutting the share count and raising the per-share price by the same ratio. Ownership percentages do not change.
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How it works
In a 1-for-10 reverse split, every ten shares become one. A holder of 5,000 shares ends up with 500, and a stock that closed at $0.40 opens around $4.00. The company's market value, and each holder's percentage of the company, are unchanged by the split itself. Fractional shares created by the ratio are usually paid out in cash or rounded.
Warrants, options and convertible securities are normally adjusted by the same ratio, so the number of shares they convert into falls and their exercise or conversion prices rise.
Why companies do it
- Listing rules. Nasdaq and the NYSE require a minimum bid price, commonly $1.00, and a reverse split is the most direct way to cure a deficiency.
- Institutional eligibility. Some funds and brokers restrict trading in very low-priced stocks.
- Room to issue. Cutting the share count while the number of authorized shares stays the same leaves more authorized shares available for future issuance.
What to watch for
A reverse split is disclosed in advance, usually through a shareholder vote in a proxy statement (DEF 14A) and then an 8-K announcing the ratio and effective date. When comparing share counts or prices across time, adjust for the ratio: a share count that falls by 90% in one day is a reverse split, not a buyback.
A reverse split does not change the dilution that happened before it, and it often comes alongside new financing such as an ATM offering.
Related terms
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