What Happens to My Shares in a Reverse Split?

A notice appears in your account: the company has announced a 1-for-10 reverse split, effective at the open on a date a few days out. You hold 1,005 shares at 0.80. On that morning you will hold about a tenth as many, and the quote will show a price about ten times higher.

Nothing about the business changes that morning.

How the combination works

A reverse split merges existing shares into fewer, larger ones. At 1-for-10, every ten shares you own become one, and the market price adjusts upward by the same factor, which means the dollar value of your position is the same immediately after the split as immediately before it, before the market starts trading and moving the price on its own.

The cash-out price for fractions is set by the terms of the split, and it may differ from the price in that example. Some companies round fractional shares up to a whole share. Others pay cash. The announcement says which.

What happens to your cost basis

Your total cost basis moves across to the new share count. The per-share figure is multiplied by the ratio.

The cash for the fraction is generally treated as a sale of that fraction, against its share of the basis, so in the example you would have received 4.00 against 7.50 of basis, a small loss on half a share. Confirm how it is reported with a tax professional, and check that your broker’s lot detail shows the adjusted basis and the original purchase dates.

Why companies do it

The most common stated reason is price. Exchanges set continued listing standards, and those include a minimum bid price, so a company whose shares have traded below that level for too long risks delisting, and a reverse split lifts the quoted price back above the line in a single step. Companies also cite wanting a price that more institutions will buy, or that looks less like a penny stock.

A higher quoted price does nothing to the value of the company. That point is argued at length in share price is not value.

What traders watch afterward

How a stock behaves after a reverse split depends on the company. What traders look at is specific:

• Further dilution. Share count falls, but the number of shares the company is authorized to issue may not fall with it, which leaves room for new offerings, warrants or convertible notes that push the count back up.
• The reason in the filing. A listing deadline tells you something different from a planned uplisting.
• Float and liquidity. Fewer shares outstanding can mean a thinner float, wider spreads and faster moves.
• Repeat splits. A company that has done this before is worth reading closely.

Your orders and your records

Many brokers cancel open orders in a stock that reverse splits, and some adjust. Check yours, and see what happens to your open orders after a split for the arithmetic, which here runs backward: multiply prices by the ratio and divide quantities by it, so a sell stop at 0.70 on 1,000 shares would become a stop at 7.00 on 100.

The stock usually receives a new CUSIP number, and your statement may show the old and new positions as separate lines around the effective date. Charts usually back-adjust. Your old price levels will look ten times higher on them.