Reverse Stock Splits: Understanding Corporate Actions & Investor Impact

The reverse stock split is a corporate action that results in fewer shares outstanding for a publicly traded company. In a reverse stock split, the company declares that, as of the split date, each shareholder of record will have their overall holding shrunk by a set factor and the price increased by the same factor. For example, if you own 100 shares of ABC common equity that is trading at $10 per share and the stock experiences a 2-to-1 reverse stock split, as of the split date you will now own 50 shares of stock. The stock’s market price will be adjusted up from $10 to $20 at the same time. The net effect on each investor will be zero. Your shares are worth $1000 both before and after the reverse split.

Despite the zero net effect of a reverse stock split, they are generally viewed as negative. This action by a company signals that the company wants the stock to trade at a higher price and does not have confidence that the stock will get there on its own. In cases of reverse ETFs, this is sometimes done because the shares are too bunched, but generally, a stock split is considered positive and a reverse split is considered negative.