Reverse stock split
A reverse stock split is a corporate action combining existing shares into fewer shares, cutting the share count and raising the per-share price by the same ratio; ownership percentages stay the same.
Last verifiedHow it works
In a 1-for-10 reverse split, every ten shares become one. A holder of 5,000 shares ends up with 500, and a stock that closed at $0.40 opens around $4.00. The company's market value, and each holder's percentage of the company, are unchanged by the split itself. Fractional shares created by the ratio are usually paid out in cash or rounded.
Warrants, options and convertible securities are normally adjusted by the same ratio, so the number of shares they convert into falls and their exercise or conversion prices rise.
Why companies do it
- Listing rules. Nasdaq and the NYSE require a minimum bid price, commonly $1.00, and a reverse split is the most direct way to cure a deficiency.
- Institutional eligibility. Some funds and brokers restrict trading in very low-priced stocks.
- Room to issue. Cutting the share count while the number of authorized shares stays the same leaves more authorized shares available for future issuance.
What to watch for
A reverse split is disclosed in advance, usually through a shareholder vote in a proxy statement (DEF 14A) and then an 8-K announcing the ratio and effective date. When comparing share counts or prices across time, adjust for the ratio: a share count that falls by 90% in one day is a reverse split, not a buyback.
An ADS ratio change is a related but different action: it changes how many ordinary shares each American depositary share represents, so ADS holders hold fewer ADSs while the ordinary shares are not consolidated. See the stages of a reverse split and ADS ratio changes.
Approval depends on the company's state of incorporation and charter. A Nevada board can act alone in some cases, Delaware requires a vote, and holders with enough votes can approve by written consent. See reverse splits without a shareholder vote, Schedule 14C information statements and how to use the Reverse Splits page.
A reverse split does not change the dilution that happened before it, and it often comes alongside new financing such as an ATM offering.
Guides that use this term
- What Is Stock Dilution? How New Shares Affect YouStock dilution explained with worked numbers: what happens to your ownership when a company issues new shares, and where to spot it coming in SEC filings.
- How to Trade Penny Stocks Without Getting DilutedA dilution-first guide to penny stocks. How new shares reach the tape, which SEC filings announce them, worked examples, and a 20-minute filing check.
- Authorized Share Increases: Reading the Proxy VoteWhat authorized shares are, why companies ask shareholders to increase them, how to calculate real headroom, and how a reverse split changes the share math.
- Full Ratchet Anti-Dilution and Price Resets ExplainedFull ratchet vs weighted-average anti-dilution explained, plus price resets, with a worked share-count table as the stock falls from $1.00 to $0.10 per share.
- The Reverse Split Dilution Cycle ExplainedHow reverse splits, resale registrations and convertible financings can repeat as a dilution cycle, with a typical timeline and a worked two-loop share count.
- Stock Performance After an Offering: How to Measure ItHow to measure stock performance after an offering: pick precise event dates, set return windows, adjust for splits, benchmark the market and mind sample size.
Related terms
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DilutionScan reads each covered company's SEC filings and lists its warrants, convertibles, ATM programs, shelves and S-1s on one page, with a dilution rating and cash runway.
Definition from the Signal8 Academy glossary. Educational content only. DilutionScan and Signal8 are not broker-dealers or investment advisers, and nothing here is a recommendation to buy or sell any security.