Glossary
Reverse stock split
A corporate action that combines shares into fewer, higher-priced ones, such as 1-for-10, often to meet an exchange minimum price.
A reverse stock split combines a company's existing shares into fewer shares, raising the price of each one in proportion. In a 1-for-10 reverse split, every 10 shares you own become 1, and a $0.80 stock becomes an $8 stock. The total value of your holding and your ownership percentage do not change at the moment of the split. Companies usually do it to lift a low share price, most often to stay listed on an exchange.
How it works
The board, and often shareholders, approve a ratio, and the exchange sets an effective date. On that date the share count shrinks, the price adjusts and the stock frequently gets a new CUSIP identifier.
Why companies do it
- Listing rules. Nasdaq and the NYSE generally require a minimum closing price of $1. A company that closes below that for 30 consecutive business days receives a deficiency notice and usually has 180 calendar days to regain compliance. A reverse split is the fastest fix.
- Image and access. Some institutions and funds avoid very low-priced stocks, and many brokers restrict margin on them.
What to watch for
A reverse split changes nothing about the business, so the reasons behind it matter more than the mechanics. It often signals a company under pressure, and many such stocks continue to fall afterward, though results vary widely. Look at whether the company is also raising money, which could cause further Dilution, and whether it has done reverse splits before. Exchanges have tightened rules in recent years to curb repeated reverse splits used to avoid delisting.