Table Of Content
What Is a Reverse Stock Split and How Does It Work?
A reverse stock split reduces the number of a company's outstanding shares while increasing the price per share proportionally.
This financial maneuver does not change the company's total market value, but it restructures how shares are held and traded.
For example, in a 1-for-10 reverse split, every 10 shares become 1 share, and if the original price was $1, it adjusts to $10.
Scenario | Before Split | After 1-for-10 Split | Change |
|---|---|---|---|
Number of Shares Owned | 1,000 | 100 | 90% fewer shares |
Share Price | $1 | $10 | 10x higher |
Total Investment Value | $1,000 | $1,000 | No change |
Why Companies Choose to Do Reverse Splits?
Reverse stock splits are typically used to address technical or strategic challenges without changing a company's overall market value. Common reasons include:
Avoid Delisting: Boosts share price to meet minimum exchange listing requirements (e.g., NASDAQ’s $1 rule).
Enhance Market Perception: Higher share prices may attract institutional investors who avoid low-priced stocks.
Restructure After Dilution: Helps clean up the share structure after excessive stock issuance.
Position for Growth: Prepares the company for mergers, acquisitions, or long-term capital raises.
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Examples
In 2022, SNDL executed a 1-for-10 reverse stock split to raise its stock price above the $1 threshold required by NASDAQ. This allowed the company to avoid delisting and maintain investor confidence.
Back in 2011, Citigroup enacted a 1-for-10 reverse split after the financial crisis. The move helped the company shed its “penny stock” image and re-enter the radar of institutional investors.
Company | Year | Reverse Split Ratio | Reason |
|---|---|---|---|
Sundial Growers | 2022 | 1-for-10 | Maintain NASDAQ listing |
Citigroup | 2011 | 1-for-10 | Rebuild credibility post-crisis |
Because reverse splits adjust share prices without adding value, they are mostly cosmetic. But they can be necessary tools to meet regulatory or strategic goals.
Do Reverse Stock Splits Signal Company Weakness?
Reverse stock splits can be a red flag, especially if triggered by prolonged share price decline. They often indicate a company is struggling to stay listed or is dealing with investor skepticism.
However, not all reverse splits are signs of distress—some are strategic moves to restructure shares and attract different types of investors.
Therefore, it’s important to look at the underlying reason behind the split, rather than assume it always means trouble.
How to React as an Investor to a Reverse Stock Split
A reverse stock split can seem alarming, but it’s important to understand what it means for your investment strategy.
Evaluate the Reason: Check if the reverse split is to avoid delisting or part of a broader restructuring plan. For example, Citigroup’s split helped regain credibility.
Look at Fundamentals: A higher share price doesn’t fix poor earnings or declining revenue—therefore, review the company’s financial health.
Monitor Market Reaction: Some splits trigger short-term volatility, especially if investors see it as a sign of distress.
Consider the Long-Term Plan: Companies may use reverse splits in order to attract institutional investors or prepare for a merger.
Stay Informed Through Filings: Always read SEC 8-K or proxy filings to understand management’s rationale and goals.
Reverse splits don't change your total investment value immediately, but how a company manages the change matters greatly.
What Happens to Options and Dividends After a Reverse Split?
Reverse stock splits affect more than just share counts—they also impact open options contracts and dividend structures.
Options Are Adjusted (Not Cancelled): If you hold options, the OCC (Options Clearing Corporation) adjusts strike prices and contract terms to reflect the new share ratio.
Strike Prices Rise: For example, a 1-for-5 reverse split turns a $2 call option into a $10 call, with fewer shares.
Dividend Yield May Stay the Same: If dividends are paid per share, the rate adjusts upward proportionally. As a result, total income remains similar.
Fewer Shares, Same Value: Whether you hold stock or options, your overall market value remains unchanged after the split.
Expect Temporary Confusion: It may take time for brokerages to reflect adjusted positions, especially for options and reinvested dividends.
Therefore, it’s crucial to review your brokerage updates and contract terms after any announced reverse stock split.
FAQ
A regular stock split increases the number of shares and reduces the price per share, while a reverse stock split does the opposite. Both keep the total investment value unchanged.
Yes, because it reduces the number of outstanding shares, a reverse split can lower trading volume and potentially reduce liquidity in the short term.
They are less common than regular splits and are typically seen in struggling or restructuring companies looking to meet listing standards or improve image.
Technically, yes. A company could later issue a forward stock split, but this is rare unless the stock price significantly increases again.
No, they do not impact your percentage of ownership. Every shareholder’s stake is adjusted proportionally to the split.
The split itself doesn't cause a loss, but if the market reacts negatively or the company performs poorly afterward, your holdings could decline in value.
Yes, they are legal and commonly practiced in major exchanges, as long as companies follow proper disclosure and governance procedures.
Not always. Some companies are authorized through their charter or board to proceed without full shareholder approval, depending on the jurisdiction.
Fractional shares are often cashed out. For instance, if you end up with half a share, you may receive a cash payment instead.
Yes, and it’s a known tactic. However, savvy investors often investigate further to assess if the move reflects real progress or just optics.
Implementation varies but usually occurs within a few weeks after board approval and notification to shareholders and regulatory bodies.
Yes, since the number of shares decreases, EPS usually rises artificially, even though net income remains the same.
