Let's take a look at a real-world example of a reverse stock split. If a company whose stock you own announces a reverse split, the best course of action is to read the press release and SEC filings detailing the reasons and decide if it was a smart business decision or a desperate maneuver to prop up the stock price. The short answer to the question, "Is a reverse stock split good?," is that it depends on the circumstances.
Stocks that go through reverse splits often see renewed selling pressure afterward, and the number of companies that emerge from reverse splits to produce strong long-term returns is small. However, a reverse split can certainly change investor perception of the company. So it's fair to say that a reverse split can be an effective tool for struggling companies to use.Īs previously noted, the reverse split itself doesn't result in any change in the value of an investor's position in a stock because the smaller number of post-split shares is offset by the proportionally higher per-share price. Since bottoming in late 2000, shares of the travel company are up more than 6,000%. For instance, a reverse split worked for internet travel giant Priceline, now Booking Holdings ( NASDAQ:BKNG), which did a 1-for-6 reverse split following the internet tech bust. In rare cases, a reverse split buys a company the time it needs to get back on track. That said, a reverse split is usually taken as a sign of trouble by the market, and most of the time it isn't done for a positive reason. It is simply a change in the stock structure of a business and doesn't change anything related to the business itself. Plus, many institutional investors are not permitted to invest in stocks with share prices below a certain minimum.Ī reverse split isn't necessarily good or bad by itself. For example, the New York Stock Exchange has rules that allow it to delist a stock that trades below $1 per share for an extended period. The most common reason is to meet a requirement from a stock exchange to avoid having its shares delisted. Why do companies do reverse stock splits?Ī company does a reverse split to increase its share price. To be perfectly clear, a reverse stock split doesn't change the overall value of your investment - at least not all by itself. That will leave your smaller position still worth the same amount since 100 shares multiplied by $10 per share equals $1,000. Immediately after the reverse split, the stock price will rise tenfold to $10 per share. If you own 1,000 shares - worth $1,000 at current prices - you'll get one new share for every 10 old shares you own, or 100 new shares.
For instance, say a stock trades at $1 per share and the company does a 1-for-10 reverse split. Simply divide the number of shares you own by the split ratio and multiply the pre-split share price by the same amount. The new share price is proportionally higher, leaving the total market value of the company unchanged.Ĭalculating the effects of a reverse stock split is easy. A reverse split takes multiple shares from investors and replaces them with fewer shares. Reverse stock splits work the same way as regular stock splits but in reverse. What does a reverse stock split mean to an investor?Ī reverse stock split happens when a corporation's board of directors decides to reduce the outstanding share count by replacing a certain number of them with a smaller number.
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