Reverse split
A reverse split combines a company's shares into fewer, higher-priced shares. In a 1-for-10 reverse split every ten shares become one and the price is multiplied by ten, so the value of a holding does not change. Small caps usually do it to lift a price that has fallen under 1 dollar and keep their exchange listing.
Why it matters to a small-cap momentum trader
A reverse split cuts the share count and the float by the same ratio, so a stock with a large, sleepy float can come out of it with a small one. Small floats move fast, and some reverse-split stocks run hard in the days after the split. Many others keep falling, because the reason for the split, a falling price and a need for cash, has not gone away, and a higher price makes it easier to sell new stock.
The listing rule behind most reverse splits
Minimum bid. Nasdaq requires a listed stock to keep a bid of at least 1 dollar (Listing Rule 5550(a)(2) for the Capital Market).
Deficiency. After 30 consecutive business days with the bid under 1 dollar, the company receives a deficiency notice, which it discloses on a Form 8-K.
Compliance period. It then has 180 calendar days to regain compliance by closing at 1 dollar or more for at least 10 consecutive business days (Rule 5810(c)(3)(A)). A reverse split is the quick way to get there.
The exchanges have tightened these rules in recent years, for instance on companies that split repeatedly. Read the company's own 8-K for the terms that apply to it.
What changes, and what does not
- Changes: the share count, the float, the price and every per-share number, by the ratio.
- Does not change: the company's market value at the moment of the split, or any holder's share of it.
- Odd holdings: holders left with a fraction of a share usually get cash for it. The stock often gets a new CUSIP, and for a few days some data vendors show a temporary symbol.
Reverse splits in Hindsight Markets
Charts are adjusted for a split only once its ex-date has come, never for one that had not happened yet on the day you replay. A replay of the morning before a split shows the old prices, the way traders saw them; the morning after, history is scaled to the new shares.
A worked example: a 1-for-20 reverse split
An illustration with round numbers, not a real stock or a real day.
Before. 80 million shares outstanding, a float of 60 million, last price 0.25. Market value = 80 million × 0.25 = 20 million dollars.
After. Shares outstanding = 80 million ÷ 20 = 4 million. Float = 60 million ÷ 20 = 3 million. Price = 0.25 × 20 = 5.00. Market value = 4 million × 5.00 = 20 million dollars, unchanged.
A holder. 10,000 shares at 0.25 (2,500 dollars) become 10,000 ÷ 20 = 500 shares at 5.00, still 2,500 dollars.
The trader's view. The float went from 60 million to 3 million. A day that trades 6 million shares is now a float rotation of 2.
Common mistakes small-cap traders make with reverse splits
- Reading the split as good news. It changes the units, not the business. The company still needs the cash it needed before.
- Using an old float. A scanner or filing from before the split shows twenty times the shares in the example above. Check the split date against the float's date.
- Forgetting the shelf. A higher price and a fresh float make an offering easier. Many reverse splits are followed by a raise.
- Comparing an adjusted chart with an old note. A level you wrote down before the split is in the old units. Multiply it by the ratio first.
Common questions
- Is a reverse stock split good or bad?
- By itself it is neither: the value of every holding is the same the moment it happens. It is usually a sign of a stock that has fallen a long way and a company that needs to keep its listing, which is why the price often keeps sliding.
- What happens to my shares in a reverse split?
- You get fewer shares at a higher price, worth the same in total. In a 1-for-10, 1,000 shares at 0.50 become 100 shares at 5.00. A fraction of a share is usually paid out in cash.
- What is the difference between a stock split and a reverse split?
- A forward split, such as 2-for-1, gives you more shares at a lower price. A reverse split gives you fewer shares at a higher price. Neither changes the value of what you own on the day.
- Why do companies do a reverse split?
- Mostly to get back above the exchange's 1 dollar minimum bid. Some also want a price that funds and brokers will hold, or a share count that leaves room to issue new stock.
- Does a reverse split reduce the float?
- Yes, by the same ratio as the share count. A float of 30 million becomes 3 million after a 1-for-10. New shares sold after the split will grow it again.
How to practise it in Hindsight Markets
- Open a past trading day and run the Recent Reverse Split scan: splits from the last 30 days, newest first, with the Split ratio beside each.
- Add the Float and Float rotation columns to see the new, smaller supply.
- In the chart settings, turn on Splits under Events. An S badge marks the split; the history before it is scaled to the new shares.
- Open the Filings window and read the 8-K that announced the split and its ratio.
- Trade it if it moves, and note whether an offering followed in the days after.
Practice this on a real past day in Hindsight Markets
Replay a day after a small cap's reverse split, see its chart as traders saw it that morning, and trade the new, smaller float.