How do you profit from a reverse stock split?

Reverse stock splits do not increase or decrease the company’s value or the shares of stock outstanding, so it does not provide an opportunity to profit solely from the act of the reverse split. Reverse stock splits increase the price per share of the company’s stock to appear more attractive to potential investors. Fund managers may not be able to purchase low dollar-priced stocks under a certain threshold, such as $5 per share, so reverse stock splits may increase the stock price to a level where institutional investors can purchase the stock. 

Is a reverse stock split good or bad?

Companies often use a reverse stock split after a significant decline in stock price because reverse splits increase the price per share of the company’s stock, making the stock appear more attractive to potential investors. It is neither good nor bad for the investor, as there is no effect on the company’s total market value with a reverse stock split. As shares outstanding decrease, each share’s value increases proportionately, so there is no change in shareholder’s equity or market value for the company at the time of the split.

Do you lose money on a reverse split?

No. A reverse stock split is a decrease in the number of shares of stock outstanding without any change in shareholder’s equity or market value for the company at the time of the split. As shares outstanding decrease, each share’s value increases proportionately, so there is no effect on the company’s total net value with a reverse stock split, and the investor will still control the same amount of equity. They will simply have fewer shares of stock, but each share will have more value.

How does a reverse stock split work?

A reverse stock split is a decrease in the number of shares of stock outstanding without any change in shareholder’s equity or market value for the company at the time of the split. As shares outstanding decrease, the value of each share increases proportionately, so there is no effect on the company’s total net value with a reverse stock split.

For example, a one-for-two reverse stock split would halve the number of shares outstanding and give every shareholder one share for every two shares owned while doubling the value of each share. Consider a shareholder with 200 shares of XYZ stock at $5 per share for a total market value of $1,000. If company XYZ announces a one-for-four reverse stock split,  the shareholder would now have 50 shares of XYZ stock at $20 per share for a total market value of $1,000.

Reverse splits can be one-for-two, one-for-four, one-for-ten, or any proportion the board of directors chooses.