- A reverse stock split reduces the number of outstanding shares available. To compensate for the reduced number of shares, the stock price is increased.
- The overall company’s value(market capitalization) doesn’t change, nor does the total dollar amount of stock you own(it does not create a gain or loss for the investor).
- Stock splits are decided by the company’s board of directors.
- To be eligible, shares must be purchased before the stock’s split effective date.
- Splitting of fractional shares is up to the brokerage.
A reverse stock split reduces the number of outstanding shares in the company and the company’s stock price gets increased proportionately. In a 1-for-2 reverse stock split, the company reduces the number of shares by 2, and the stock price is multiplied by 2.
Examples with a recent notable reverse stock splits:
Aurora Cannabis Inc (ACB):
- Split Ratio: 1-for-12
- Effective Date: 5/11/20
For example, if you own or purchase 100 shares of ACB (before the effective date of 5/11/20) trading at $0.50 per share(total investment value $50), after the split on 5/11/20, you will own 8.33 (100 / 12) shares valued at $6.00 ($.50 * 12) per share(total investment value is still $50).
Important things to note:
- Stock splits happen automatically, and no action needs to be taken by the investor. There are no fees associated with stock splits.
- Splitting of fractional shares is dependent on the brokerages the shares are held at.
- Stock splits themselves do not make a company more or less valuable. However, investors interpret them in different ways, and it can ultimately affect the stock price in the short-term.