Reverse stock split
Encyclopedia
On a stock exchange
, a reverse stock split or reverse split is a process by a company of issuing to each shareholder in that company a smaller number of new shares in proportion to that shareholder's original shares that are subsequently canceled. A reverse stock split is also called a stock merge. The reduction in the number of issued shares is accompanied by a proportional increase in the share price. New shares are typically issued in a simple ratio, e.g. 1 new share for 2 old shares, 3 for 4, etc. A reverse split is the opposite of a stock split
.
Typically, the stock will temporarily add a "D" to the end of its ticker during a reverse stock split. Sometimes a company may concurrently change its name. This is known as a name change and consolidation (i.e. using a different ticker for the new shares).
There is a stigma
attached to doing a reverse stock split, so it is not initiated without very good reason and may take a shareholder or board meeting for consent. Many institutional investor
s and mutual fund
s, for example, have rules against purchasing a stock whose price is below some minimum, perhaps US$5. In an extreme case, a company whose share price has dropped so low that it is in danger of being delisted from its stock exchange, might use a reverse stock split to increase its share price. For these reasons, a reverse stock split is often an indication that a company is in financial trouble.
A reverse stock split may be used to reduce the number of shareholders. If a company completes reverse split in which 1 new share is issued for every 100 old shares, any investor holding less than 100 shares would simply receive a cash payment. If the number of shareholders drops, the company may be placed into a different regulatory
categories and may be governed by different law (i.e. whether company is regulated by SEC, in part, depends on the number of shareholders). From time to time, companies will issue a reverse split concurrently with a forward split. A forward split is rarely undertaken independently of a reverse split.
Note that in reverse and forward splits, the shareholder's old shares are cancelled, as they receive a number of new shares in proportion to their original holdings. By contrast, in a simple stock split
, the original shares remain on the exchange as shareholders receive additional shares based on their existing holdings. In both stock splits and reverse splits, the share price is adjusted in proportion to the increase in shares to maintain equal value.
As an example of how short splits work, ProShares Ultrashort Silver (ZSL) underwent a 1-10 reverse split on April 15, 2010, which grouped every 10 shares into one share; accordingly, this multiplied the close price by 10, so the stock finished at $36.45 instead of $3.645. On February 25, 2011, ZSL had a 1-4 reverse split (every 4 shares became one share, which multiplied the close price by 4, to $31.83). Because of these two actions, one share of ZSL as of February 26, 2011 represents 40 shares of ZSL before April 15, 2010. These splits were necessary to maintain the price of the fund, whose value fell 90.2% from April 15, 2010 to April 21, 2011, and over 98% since December 3, 2008. Had the reverse splits not taken place, ZSL's closing price on April 21, 2011 would have been $0.3685, rather than $14.74, or .3685*40.
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
, a reverse stock split or reverse split is a process by a company of issuing to each shareholder in that company a smaller number of new shares in proportion to that shareholder's original shares that are subsequently canceled. A reverse stock split is also called a stock merge. The reduction in the number of issued shares is accompanied by a proportional increase in the share price. New shares are typically issued in a simple ratio, e.g. 1 new share for 2 old shares, 3 for 4, etc. A reverse split is the opposite of a stock split
Stock split
A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included....
.
Typically, the stock will temporarily add a "D" to the end of its ticker during a reverse stock split. Sometimes a company may concurrently change its name. This is known as a name change and consolidation (i.e. using a different ticker for the new shares).
There is a stigma
Social stigma
Social stigma is the severe disapproval of or discontent with a person on the grounds of characteristics that distinguish them from other members of a society.Almost all stigma is based on a person differing from social or cultural norms...
attached to doing a reverse stock split, so it is not initiated without very good reason and may take a shareholder or board meeting for consent. Many institutional investor
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
s and mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s, for example, have rules against purchasing a stock whose price is below some minimum, perhaps US$5. In an extreme case, a company whose share price has dropped so low that it is in danger of being delisted from its stock exchange, might use a reverse stock split to increase its share price. For these reasons, a reverse stock split is often an indication that a company is in financial trouble.
A reverse stock split may be used to reduce the number of shareholders. If a company completes reverse split in which 1 new share is issued for every 100 old shares, any investor holding less than 100 shares would simply receive a cash payment. If the number of shareholders drops, the company may be placed into a different regulatory
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
categories and may be governed by different law (i.e. whether company is regulated by SEC, in part, depends on the number of shareholders). From time to time, companies will issue a reverse split concurrently with a forward split. A forward split is rarely undertaken independently of a reverse split.
Note that in reverse and forward splits, the shareholder's old shares are cancelled, as they receive a number of new shares in proportion to their original holdings. By contrast, in a simple stock split
Stock split
A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included....
, the original shares remain on the exchange as shareholders receive additional shares based on their existing holdings. In both stock splits and reverse splits, the share price is adjusted in proportion to the increase in shares to maintain equal value.
As an example of how short splits work, ProShares Ultrashort Silver (ZSL) underwent a 1-10 reverse split on April 15, 2010, which grouped every 10 shares into one share; accordingly, this multiplied the close price by 10, so the stock finished at $36.45 instead of $3.645. On February 25, 2011, ZSL had a 1-4 reverse split (every 4 shares became one share, which multiplied the close price by 4, to $31.83). Because of these two actions, one share of ZSL as of February 26, 2011 represents 40 shares of ZSL before April 15, 2010. These splits were necessary to maintain the price of the fund, whose value fell 90.2% from April 15, 2010 to April 21, 2011, and over 98% since December 3, 2008. Had the reverse splits not taken place, ZSL's closing price on April 21, 2011 would have been $0.3685, rather than $14.74, or .3685*40.