Cheat Sheet:
A reverse stock split reduces the number of outstanding shares available. The stock price is increased to compensate for the reduced number of shares.
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.
Shares must be purchased before the stock’s split effective date to be eligible.
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 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 differently, and it can ultimately affect the stock price in the short-term.