Stocks · Intermediate · 5 min

Stock splits and reverse splits

You can calculate shares and price after a split or reverse split, explain why the value does not change, and read what a reverse split often signals.

More slices, same pizza

One morning your app shows that your shares have lost half their price, and you own twice as many as yesterday. Nothing has been lost, and nothing has been gained. The company has split its shares.

Splits and reverse splits are among the most common corporate actions, and among the most misunderstood. They change the number and the price of shares, not the value of the company. But a reverse split in particular can tell you something about the situation a company is in.

Same value, new count

In a stock split, each existing share is divided into several new ones. The price per share falls by the same factor.

The SEC's example: in a 2-for-1 split, 100 shares at 100 become 200 shares at 50. The total market value stays the same. Splits are usually done when a share price has risen a lot, to make single shares more affordable. The company, its profits and your share of ownership do not change.

A reverse stock split does the opposite. Several shares are combined into one, and the price rises accordingly. Investor.gov describes a 1-for-10 reverse split: 10,000 shares become 1,000. Fractions that do not add up to a full share are often paid out in cash.

Reverse splits frequently come from companies whose share price has fallen very low. FINRA notes that they often go hand in hand with low-priced, high-risk stocks. One reason: exchanges have minimum price rules. On Nasdaq, a share must keep a bid price of at least 1 dollar. If it stays below for 30 business days in a row, the company is out of compliance and risks being delisted. A reverse split lifts the price above the line, but it does not change the business.

Charts handle splits by adjusting history. Most price charts divide all prices before a split by the split factor, so the chart stays comparable. Without that, a 2-for-1 split would look like a 50% crash.

Reverse split, same business

A fictional company's share has fallen to 0.40. It announces a 1-for-10 reverse split.

An investor with 10,000 shares worth 4,000 now holds 1,000 shares at about 4.00. Still worth 4,000.
The share is back above Nasdaq's 1-dollar line.
Six months later, the losses continue, and the price slides to 0.90.

The reverse split fixed a listing problem for a while. It did not fix the reason the price had fallen. Investors who saw the jump from 0.40 to 4.00 on an unadjusted screen may even have thought the share had soared tenfold. Checking the corporate actions first would have shown that nothing had changed in value.

Common mistakes

"A split makes the share cheaper." The price per share falls, but the company is not cheaper.
Buying because of a split. It changes nothing about the business.
Ignoring reverse splits as a signal. They often follow a long decline.
Reading unadjusted charts. A sudden cliff may be a split, not a crash.

The takeaway

A split cuts the price and multiplies the shares, a reverse split does the opposite. Your holding's value stays the same at that moment.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the side that shows the holding after the split.

Tap the chart.

Twice the shares at half the price: the value is still 10,000. The SEC uses the same example.
2You own 10,000 shares at 0.40. The company does a 1-for-10 reverse split. What do you hold afterwards?

Every ten shares become one, and the price rises about tenfold. The value stays about 4,000.
3Why do some companies on US exchanges carry out reverse splits?

Nasdaq requires a minimum bid price of 1 dollar. A share that stays below it for 30 business days in a row falls out of compliance.
4After a split, your chart suddenly shows the share's old prices at half their level. Why?

Adjusted charts divide old prices by the split factor. Otherwise the split would look like a 50% crash.

of 4 correct.