Reverse Stock Splits: Good or Bad for Shareholders? (2024)

2022 featured hundreds of reverse stock splits, and that torrid pace continued into 2023 (although it does seem to be slowing down a touch this year). I found that most of the reverse stock splits were in small biotech stocks, followed by technology, then energy.

The splits in energy aren’t unexpected, as after vast expansion in the industry, low oil prices sent many fortunes reeling. And the biotech and technology companies were mostly cheap stocks with shaky fundamentals, or companies that have run into some misery. In addition, the biotechs are mostly a speculative bunch with the need to burn cash at a rapid rate, so I can’t say I was too surprised to see the abundance of their reverse stock splits.


Most of the time, these reverse stock splits are not good for investors. And with such an escalation in reverse stock splits, I thought it might be time to review the good and the bad aspects of reverse stock splits in case you own shares in a company that just executed or are contemplating executing a reverse split.

What Is a Reverse Stock Split?

Simply put, reverse stock splits occur when a company decides to reduce the number of its shares that are publicly traded.

For example, let’s say you own 100 shares in Cute Dogs USA, and they are trading at $2 per share each. So, your total shares are worth $200 (100 x $2 each). If Cute Dogs decides to do a 1:2 reverse split, that means you will now own 50 shares, trading at $4 each. Your investment is still worth $200, but the stock’s price is double what it was. Earnings per share are also now doubled.

That sounds good, right? Well, not so fast …

Why Would a Company Reverse-Split its Shares?

Investors have been trained by Wall Street to expect companies to split their stock, by adding to—not deducting from—their share count. And generally, those kinds of stock splits are good news.

But that’s usually not the case with reverse stock splits. In fact—with a few rare exceptions—reverse stock splits are bad news for investors. Here’s why:

The number one reason for a reverse split is because the stock exchanges—like the NYSE or Nasdaq—set minimum price requirements for shares that trade on their exchanges. And when a company’s shares decline to near—or below—that level, the easiest way to stay in compliance with the exchange is to reduce the number of outstanding shares so that the price of the individual shares—like magic—automatically rises. And when that happens, the company’s shares can remain trading on the exchange.

Of course, while the shares may get an initial boost, don’t expect it to last. If a company’s fortunes—and shares—have been waning, savvy investors will see the reverse split as a big red flag and continue selling, sending the share price back down.

Most—although not all—reverse splits are seen in small penny stocks that have not been able to attain steady profitability and create value for their shareholders. I found that was the case in most of the biotechs’ recent reverse stock splits. Many are on the verge of bankruptcy, and they use a reverse split as a last-ditch effort to revive their failing fortunes.

But sometimes, companies will affect a split so that their shares trade higher, with the intention of making them more attractive to mainstream investors and/or to ease the way to listing on a national exchange.

Here are two recent examples of reverse stock splits, one from just a few months ago, and another longer-term example that shows how this kind of action can proceed over the years. You can see how investors typically respond to these events in the months that follow:

Express (EXPR): 1 for 20, August 31, 2023

Reverse Stock Splits: Good or Bad for Shareholders? (1)

Express (EXPR) is down 88% in the last year and more than 97% in the last five. And, shares are down about 80% from before the split was effected.

LogicMark (LGMK) (Formerly NXT-ID (NXTD)): 1 for 10, October 18, 2021; 1 for 20, April 23, 2023

Reverse Stock Splits: Good or Bad for Shareholders? (2)

LogicMark (which underwent a name change from NXT-ID in March 2021) is down 98.6% since its reverse stock split a little over two years ago and has undergone a second reverse split since. 200 shares acquired prior to the initial split in 2021 would have become just one share today.

Researchers at the Stern School of Business at NYU and Emory University looked at more than 40 years of data, from 1962 to 2001, and found that of the 1,600 reverse splits, shares underperformed their non-split peers by 15.6% in the first year following the split, 36% in the second year and 54% in the third year.

I read an article from Bill Mathews, editor of The Cheap Investor, which gave a good example of a recent reverse split that didn’t turn out well. Here’s a brief excerpt:

“I was talking with a friend about a stock that he had bought at $1 per share. Shortly after he bought, the price fell to $0.50. A few months later, he received notice that the company was planning to implement a 1-for-10 reverse stock split. He was wondering if that reverse stock split was a good or bad thing.

“According to the company’s press release, the reverse stock split of 1 for 10 would bring the stock price up to $5 per share, and that would prevent the stock from being delisted from the Nasdaq.

“I ran into my friend a few weeks ago and asked about the stock. The stock, which was selling at $5.00 after the reverse, is now selling at $1.25 and he is down 88%.

“In this case, the stock moving from $0.50 to $5.00 overnight was just an accounting ploy. The company still had very shaky fundamentals. Savvy institutional investors won’t invest in the stock just because its price suddenly soared, and it will have a hard time raising capital if its balance sheet is poor. Shorters, who follow reverse stock splits and target those stocks, began to put pressure on the stock price, sending it tumbling. As selling pushed the price downward, other investors panicked and sold, causing the price to plummet even lower. As my friend discovered, a reverse stock split is normally not good news for shareholders.”

But when Xerox (XRX) split its stock 1:4 in June 2017, the scenario looked much different. Ian Wyatt, editor of High Yield Wealth, wrote, “So why did Xerox bother with a reverse stock split if investor wealth remains unchanged? Visibility is the answer. Many institutional investors—mutual funds in particular—ignore stocks priced in single digits. Many investment firms ignore these stocks as well. Xerox is trying to raise its profile with its reverse-stock split.

“We’re agnostic on the reverse stock split. It could raise Xerox’s standing among institutional investors and research analysts. It could also lower Xerox’s standing among other investors. Some investors are repelled by reverse stock split. They view a reverse stock split as an insincere strategy for raising the share price. Financial performance ultimately determines value and price in the long run.”

The shares of Xerox did go up for a while following the split, but fell back and have done next to nothing since.

Reverse Splits Aren’t All Bad

Sometimes companies decide to reverse split their shares just because they want to offer their shares at reasonable prices to attract new shareholders. There are examples of stocks that have prospered after doing so, including Citigroup (C). Citi probably had the most famous reverse split—a 1 for 10 reverse split in May 2011. Citi became a $40 stock and is now trading at $55. The split was billed as “returning value to the shareholders.” The company had already survived the financial meltdown, and had begun paying a dividend, so investors thought it probably couldn’t get any worse. And they were right!

Other companies like AIG (AIG) and Motorola (MSI) have endured—and prospered—after a reverse stock split.

You can see that these firms that not only survived but prospered were fairly large and well-known businesses. And most studies have confirmed that firm size is very important in the determination of successful reverse stock splits, along with operating and price performance prior to the split, and, of course, market volatility.

I think you can conclude that, to be on the safe and conservative side of investing, if one of your holdings announces a reverse stock split, and it is a struggling, small company, you might do well to cut your losses. However, if it falls into the category of a well-run company, you can investigate a bit more to see if dumping your shares is the prudent thing to do.

Bill Mathews adds, “If a stock in your portfolio announces a reverse stock split, take a good look. If its fundamentals aren’t healthy, you might be better off selling your shares. If you really like the stock, chances are good that you can buy back those shares at a much lower price several months down the road.”

Just remember, most companies that execute reverse stock splits falter, and many don’t survive. This is speculative investing, so make sure you do your homework.

Have you ever invested in a company that subsequently performed a reverse stock split? How did it affect the stock price going forward?


*This post is periodically updated to reflect market conditions.

Nancy Zambell

Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry. She has created and/or written numerous investment publications, including UnDiscovered Stocks, UnTapped Opportunities, and Nancy Zambell’s Buried Treasures under $10. Nancy has worked with for many years as an editor and interviewer for their on-site video studios.

Reverse Stock Splits: Good or Bad for Shareholders? (2024)


Reverse Stock Splits: Good or Bad for Shareholders? ›

Many times reverse splits are viewed negatively, as they signal that a company's share price has declined significantly, possibly putting it at risk of being delisted. The higher-priced shares following the split may also be less attractive to certain retail investors who prefer stocks with lower sticker prices.

Does a reverse split hurt shareholders? ›

Increased stock price: A reverse stock split reduces the number of shares owned by stockholder but also results in a corresponding increase in stock price. This can be especially detrimental for small investors who are left with fewer shares and greater financial risks.

Is it better to buy before or after a reverse stock split? ›

One way is to buy shares of the company before the reverse split occurs with the plan to sell them soon afterwards. This can be profitable if the company's stock price increases after the split. Another way to make money from a reverse stock split is to short sell the stock of the company.

Do investors make money on a reverse stock split? ›

As previously noted, the reverse split itself doesn't result in any change in the value of an investor's position in a stock because the smaller number of post-split shares is offset by the proportionally higher per-share price. However, a reverse split can certainly change investor perception of the company.

Should I sell my stock after a reverse split? ›

Selling before a reverse stock split is a good idea, but selling after the reverse stock split is not. Since you can sell before and after a reverse stock split, selling during one is optional. The main advantage of selling before the reverse stock split is that you don't have to wait around for it to happen.

Why do investors hate reverse splits? ›

Many times reverse splits are viewed negatively, as they signal that a company's share price has declined significantly, possibly putting it at risk of being delisted. The higher-priced shares following the split may also be less attractive to certain retail investors who prefer stocks with lower sticker prices.

Do companies succeed after a reverse split? ›

Sometimes companies decide to reverse split their shares just because they want to offer their shares at reasonable prices to attract new shareholders. There are examples of stocks that have prospered after doing so, including Citigroup (C).

Why would a company want to do a reverse stock split? ›

A company may declare a reverse stock split in an effort to increase the trading price of its shares – for example, when it believes the trading price is too low to attract investors to purchase shares, or in an attempt to regain compliance with minimum bid price requirements of an exchange on which its shares trade.

Do stocks usually go up after a split? ›

Splitting the stock brings the share price down to a more attractive level. The actual value of the company doesn't change but the lower stock price may affect the way the stock is perceived and this can entice new investors.

Are stock splits good for shareholders? ›

It's basically a draw, and the value of your investment won't change. However, investors generally react positively to stock splits, partly because these announcements signal that a company's board wants to attract investors by making the price more affordable and increasing the number of shares available.

What are the risks of a reverse stock split? ›

If executed, the reverse stock split is anticipated to elevate the per share market price, but it may also inadvertently reduce stock liquidity, increase trading costs, and introduce other negative consequences.

Does a reverse stock split affect face value? ›

The number of shares held by existing investors will decrease after a reverse stock split. However, the value of their holdings will remain the same. If an investor had shares worth Rs 3,000, the value would remain the same after a reverse stock split.

Can a reverse stock split cause a short squeeze? ›

Several of these studies allude to the notion that reverse stock splits might attract short selling activity. Kadiyala and Vetsuypens (2002) suggest that if reverse stock splits enhance liquidity, as documented in Han (1995), both the risk of a short squeeze and the opportunity cost of a short sale are lowered.

How to profit from a reverse stock split? ›

If you own 50 shares of a company valued at $10 per share, your investment is worth $500. In a 1-for-5 reverse stock split, you would instead own 10 shares (divide the number of your shares by five) and the share price would increase to $50 per share (multiply the share price by five).

What is 100 shares of stock called? ›

In stocks, a round lot is considered 100 shares or a larger number that can be evenly divided by 100. In bonds, a round lot is usually $100,000 worth. A round lot is often referred to as a normal trading unit and is contrasted with an odd lot.

How does a reverse merger affect shareholders? ›

A reverse merger is when a private company becomes a public company by purchasing control of the public company. The shareholders of the private company usually receive large amounts of ownership in the public company and control of its board of directors.

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