The most obvious reason for companies to engage in reverse stock splits is to stay listed on major exchanges. On the New York Stock Exchange, for example, if a stock closes below $1 for 30 consecutive days, it could be delisted. A reverse stock split could raise the share price enough to continue trading on the exchange. During a reverse stock split, the company’s market capitalization doesn’t change, and neither does the total value of your shares.

  1. In this instance, the reverse stock split was a success for both the company and its shareholders.
  2. But this compensation does not influence the information we publish, or the reviews that you see on this site.
  3. Generally, a reverse stock split is not perceived positively by market participants.
  4. Therefore, a reverse split would reduce the share count to a point where the stock price better reflected the actual size of the current business.

Here are some factors to consider when evaluating a company in light of a reverse stock split. The previous market cap is the earlier number of total shares times the earlier price per share, which is $50 million ($5 x 10 million). The market cap following the stock merger is the new number of total shares times the new price per share, which is also $50 million ($25 x 2 million). For example, Nasdaq may delist a stock that is consistently trading below $1 per share.

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Some companies have survived and thrived after going through a rough patch that led to a reverse stock split. They tend to be well-known companies that have been underperforming recently and that want to raise their profiles. Shareholders saw a higher share price as a result of the reverse split — but they also saw a reduction in the number of shares they owned, so they didn’t make any extra money. And over the next 12 months, they lost a significant chunk of that money. On May 4, 2021, General Electric’s board announced a 1-for-8 reverse stock split.

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

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However, a reverse split can certainly change investor perception of the company. 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. Similarly, with Alphabet, its total market capitalization didn’t change (i.e., the number of shares times the stock price), just its share price did. The total value of the shares — the company’s market capitalization — will be the same after the reverse split as it was prior to the split. The minor exception to this would be if the company decided to pay out as cash any fractional shares that would result from the reverse split. A reverse split may also move a stock back to a normal trading range, which can range from $20 a share to $120 a share or thereabouts.

In rare cases, a reverse split buys a company the time it needs to get back on track. For instance, a reverse split worked for internet travel giant Priceline, now Booking Holdings (BKNG -0.63%), which did a 1-for-6 reverse split following the internet tech bust. Since bottoming in late 2000, shares of the travel company are up more than 6,000%. So it’s fair to say that a reverse split can be an effective tool for struggling companies to use. For instance, if a company’s stock is trading at $100 per share, and it performs a two-for-one stock split, an investor who owns one share would wind up with two shares valued at $50 apiece. An exchange generally specifies a minimum bid price for a stock to be listed.

What does change is the number of shares you own and how much each share is worth. This may sound like a somewhat dull event — it’s akin to trading two $50 bills for a $100 bill. But some investors see reverse stock splits as warning signs indicating that a company can’t raise its stock price by actually improving performance. The corporate action was planned as AT&T feared that the spinoff could lead to a significant decline in its share price and could impact liquidity, business, and its ability to raise capital. Despite the occasional success story, reverse splits aren’t usually a good sign for a stock. Because reverse stock splits have no fundamental impact on a company, it’s more important to look at the financial health of a stock to assess whether a reverse split is likely to work in the long run.

Reverse stock split examples

Whether a reverse stock split ultimately works out to be a positive or negative for shareholders will depend on the situation surrounding the specific company. Investors should look at any reverse stock split based on the unique issues and fundamentals of the individual company and its write a successful software rfp in 5 easy steps stock. In June 2021, General Electric announced a 1-for-8 reverse stock split to reduce its share count and raise its price. A reverse stock split happens when a public company decides to reduce the amount of its outstanding shares without affecting the underlying value of the company.

The company described it as a sensible reduction in shares to match its reduction in scope of business. General Electric provides a recent example of why reverse stock splits can spell bad news. Say a pharmaceutical company has 10 million outstanding shares in the market, which are trading for $5 per share. As the share price is lower, the company management may wish to artificially inflate the per-share price. The bottom line is that investors should carefully study the underlying developments and fundamentals of a company that employs a reverse stock split. However, one unique advantage with a reverse stock split is that a company with genuinely positive developments can now highlight its progress to the market.

The effective date is more of an accounting issue and isn’t too important for investors to know. In simple terms, if you owned 800 shares of GE before Aug. 2, you owned 100 shares when trading opened on that date. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on, top-rated podcasts, and non-profit The Motley Fool Foundation.

What is a reverse stock split?

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. Immediately after the reverse split, the stock price will rise tenfold to $10 per share. That will leave your smaller position still worth the same amount since 100 shares multiplied by $10 per share equals $1,000.

To be perfectly clear, a reverse stock split doesn’t change the overall value of your investment — at least not all by itself. The proportionate change in share price also supports the fact that the company has not created any real value simply by performing the reverse stock split. Its overall value, represented by market capitalization, before and after the corporate action should remain the same.

There are several reasons why a company may decide to reduce its number of outstanding shares in the market, some of which are advantageous. Mark R. Hake, CFA, is a Chartered Financial Analyst and entrepreneur. He has been writing on stocks for over six years and has also owned his own investment management and research firms focused on U.S. and international value stocks, for over 10 years. In addition, he worked on the buy side for investment firms, hedge funds, and investment divisions of insurance companies for the past 36 years. Lately, he is also working as Chief Strategy Officer for a tech start-up company, Foldstar Inc, based in Princeton, New Jersey.

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. All things equal, a reverse stock split is neither good nor bad and has no impact on the value of the total company. However, it often carries a negative connotation as many of the companies doing them are countering a sharp drop in their share price.