Business, Legal & Accounting Glossary
A reverse split is a reduction in the number of shares outstanding accompanied by an equivalent increase in share price. A 1-for-3 reverse split, for example, means existing shareholders end up with one-third as many shares at three times the price per share.
Penny stocks are notorious for their propensity to reverse split. Many of them exist for the sole purpose of issuing and selling new shares. Once the price has fallen too low, the company may do a reverse split to raise the price and reduce the float. This allows them to repeat the process.
There are legitimate reasons for companies to reverse split. A reverse split may be necessary to maintain a minimum per-share price dictated by a stock exchange. Reverse splits may also be used by companies undergoing bankruptcy reorganization.
A reverse split is a stock split that reduces the number of outstanding shares and proportionately increases the price per share.
Say there was a “one-for-ten” reverse split. For every ten shares you owned, you would now be left with one. Meanwhile, the share price is increased tenfold. If yesterday you owned 100 shares at $5 each, today you own 10 shares at $50 each. Your investment is still worth $500, so there’s no gain or loss from your viewpoint. Generally, if this results in fractional shares owned, the resulting fraction is paid off with cash by the company, but sometimes you are given the option of buying the remainder of a full share. If cash is received, it counts as a sale and is taxed as a capital gain or loss.
A reverse split is usually implemented by cancelling the old shares and issuing new shares to shareholders of record on a specified date. If your shares are held in street name, your broker takes care of it and you receive statements. The reverse split is mandatory. Shareholders do not have the option to opt-out.
A reverse split is usually, but not always, a sign that a company is in trouble. Companies whose share price has fallen so much that they will be delisted by an exchange will often do a reverse split to make the price per share high enough to avoid delisting.
Stock split
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This glossary post was last updated: 29th November, 2021 | 0 Views.