What is a reverse stock split?
A reverse stock split merges a company's shares into fewer ones. The ratio says how many old shares become one new share: in a 1-for-10 reverse split, every 10 shares become 1. The price of each share is multiplied by the same number, so a stock at 45 cents before a 1-for-10 split trades around 4.50 after it.
Nothing else changes at that moment. A holder who had 1,000 shares at 45 cents, worth 450 dollars, has 100 shares at 4.50, still worth 450 dollars. The company is worth the same, with its value spread over fewer, more expensive shares.
It is the opposite of a regular split, where a company with an expensive stock turns each share into several cheaper ones. Regular splits tend to come from companies whose price has risen a lot. Reverse splits tend to come from companies whose price has fallen a lot.
How to calculate a reverse split
Two operations do all the work:
Price after = price before × ratio
Shares after = shares before ÷ ratio
The same division applies to every share count: the shares you hold, the shares outstanding and the float. Here is stock A through a 1-for-10 reverse split:
| Before | After | |
|---|---|---|
| Price | 0.45 | 4.50 |
| Your shares | 255 | 25 and half a share |
| Your position | 114.75 | 114.75 |
| Float | 20 million | 2 million |
The half share is a fraction the split can't turn into a whole one. Companies usually pay fractions in cash at about the split price, or round them up to a whole share; the announcement of the split says which.
The calculator at the top of this page does the arithmetic for any ratio, price, holding and float.
Why small caps do reverse splits
The most common reason is the 1-dollar minimum. The main US exchanges require a listed stock to trade at 1 dollar or more. The details differ by exchange, but the usual pattern is this: a stock that stays below 1 dollar for about 30 trading days in a row gets a notice, and then has around six months to trade at 1 dollar or more again, typically for at least 10 days in a row. A company that can't get there faces delisting, and a delisted stock moves to the over-the-counter market, where fewer traders and funds can or will buy it.
A reverse split is the quickest way out: a 1-for-10 split turns a 40-cent stock into a 4-dollar one overnight. That is why so many reverse splits happen on small caps that have fallen for months.
The exchanges have tightened these rules in recent years. A company that has already done a reverse split recently, or several large ones, may get no grace period at all the next time its price falls under 1 dollar.
Companies announce a reverse split days before it takes effect, with the ratio and the date. On that date, the stock opens at the new price, and most charts adjust the prices from before the split to match.
What often follows a reverse split
A reverse split doesn't change the business, and traders tend to read it as a sign of where the company stands. What follows describes what small-cap traders commonly watch, as habits of the trade rather than rules.
- A much smaller float. A 1-for-10 split turns a 20-million-share float into a 2-million-share one. A stock with a float that small can move very fast on news, as the guide to low float stocks explains, and its float can rotate many times in one session, which the float rotation calculator measures.
- New shares. A company that needed a reverse split is often a company that needs cash. Offerings of new shares, and warrants that turn into shares, frequently follow, and each one grows the float back and can push the price down.
- The drift. Many stocks keep falling after a reverse split, sometimes back under 1 dollar within months. A higher price per share doesn't make the company worth more.
- Runners. Some reverse-split stocks, with their small new float, become the day's biggest movers when news hits. Those moves can reverse just as fast, often when the company sells new shares into them.
None of these is a signal on its own. The same split can come before a run and before a long slide.
Reverse splits in a scanner
A reverse split can trick a scanner. If a stock closed at 40 cents yesterday and opens at 4 dollars today after a 1-for-10 split, a tool that compares today's price with yesterday's raw close would show a 900% gap that never happened.
Traderly's scanner adjusts the previous close for the split, so the stock's gap and moves on the day it splits are measured against the price it would have had. The float shown for a stock comes from data providers, who can take a few days to reflect a split, so check the float against the company's announcement in the days after one.
Its market data is delayed 15 minutes, so the scanner is a tool for finding reverse-split stocks and studying how they traded in replay, not for trading them as they move.
Practicing with reverse splits
Reverse splits are easy to study on past sessions. Pick a few small caps that did one, and replay the first days after the split: how the smaller float traded, whether the company sold new shares, and where the price was a few weeks later. Note it in a log, and the pattern becomes familiar quickly.
The guide to practicing day trading lays out a routine for that kind of review, without money at risk.