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Reverse Splits: what are they, and what should I do about them?

05/13/2020

Maybe you woke up, checked your Webull account, and realized that yesterday you had 100 shares of stock ABC, but now you only have 10.  What?!  Where did they go?

It was probably a reverse split.

A reverse split (sometimes called a stock consolidation, stock merge, or share rollback) is when a company decides to combine multiple shares into one.  For example, if stock ABC was trading at $1, the company might decide that want to maintain listing requirements of the Nasdaq, for example, which has a minimum bid price.  They might prefer that their stock be traded at a higher price.  In order to make that happen, they would initiate a reverse split, where multiple shares combine into one.  In a 1-for-10 reverse split (1:10), ten shares would combine into one bigger share.  In a 1-for-3 reverse split, three shares would combine into one.  You get the idea.  The main point here is that the underlying value of your position never changes.  If a stock trading at $2 undergoes a 1-for-5 reverse split (1:5), and you had five shares (at $2 each, worth $10), you would now have one share worth $10.  

So if you panicked after seeing that you had fewer shares of a certain stock, check the value of your account: it’s probably the same.  A reverse split never affects the total value of your position.  If you had $100 worth of a stock before a reverse split, you’ll still have $100 afterwards.  

What if I only had one or two shares before the split?  What happens then?  Great question.  If you only had one share of a stock, and it underwent a 10-for-1 reverse split, you don’t have nearly enough shares to equal a full share after the reverse split.  Since you can’t trade fractional shares on Webull, we sell the shares for you, and give you a Cash-In-Lieu payment (usually within 7-10 business days).  

What if I have options?  Another good question.  If you are holding options and the underlying stock undergoes a reverse split, it may result in an adjustment in the number of shares deliverable upon exercise, while the exercise price remains the same.  Every situation is different, though; please read Characteristics and Risks of Standardized Options before investing in options.

A reverse split is a type of corporate action.  Corporate actions are defined as activities that bring material change to an organization and impacts its shareholders – put simply, they are big decisions made by a company.  The board of directors usually votes on these decisions, because they are generally a pretty big deal.  Other corporate actions include company name changes, payment of dividends, and mergers and acquisitions.  

Another type of corporate action is a forward/stock split.  This is the opposite of a reverse split.  For example, if company XYZ’s stock is trading at $1000 per share, they might decide that they’d like to trade at a lower share price.  They could decide on a 10:1 10-for-1 stock split.  In this case, if you held one share of XYZ, after the split you would own 10 shares worth $100 each.  

Three other points to note: splits will cancel limit and GTC orders.  Investors should replace these orders in accordance with the new stock price.  And just so you know, splits are not taxable events.  You won’t be taxed more or less because a split occurred.  Finally, if you hold a short position on a stock that has a forward split, the shares will be debited from, not credited to, your account; your short position increases due to the split.

Markets can be confusing, and the last thing you want to do is check your account and freak out because your stocks seemingly disappeared overnight.  Educating yourself on corporate actions such as reverse splits can help you feel more in control of your investments.  Don’t hesitate to reach out to your security’s investor relations team if you want further clarification.

source: https://www.webull.com/blog/36-Reverse-Splits-what-are-they-and-what-should-I-do-about-them