How to Calculate a Reverse Stock Split

When a reverse split takes place, the price of the stock automatically rises.
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Occasionally companies have a reverse stock split. They do this for a number of reasons, but often it's to increase the price of each share and not change the equity held by shareholders. You'll end up with fewer shares but they'll be worth more per share. The major reason companies do a reverse split is so their stock has a high enough price to remain on the major exchanges, but once that reverse occurs, often the stock price rises for a short time and then continues its decline.


Totaling Your Stocks

Total the number of stocks you own in the company. The reverse split trades a specific number of stocks for a smaller number worth more. As mentioned before, it doesn't change your equity in the company because the reverse split does the same thing to all stockholders. It simply makes the number of outstanding shares smaller.


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It's similar to owning 2/8 of a condominium. If you change it to 1/4, you still own the same percentage of the condominium.

Checking the Exchange Rate

Look up the exchange rate. The rate is normally a ratio such as 1:10 or 1 for 10. When a company notifies you of the reverse split, it also notifies you of the ratio of exchange. Often you can find the same information on the Internet if you don't remember receiving a notice.


Dividing Number of Shares

Divide the number of shares you own by the second number in the ratio. If the reverse split is a 1 for 10 split, simply divide your shares by 10. In this case, if you have 200 shares of XYZ corporation and it creates a reverse split of the stock at 1 for 10, you now own 20 shares.


Checking Your Value

Check your value. When companies reverse split, they also increase the value of the stock that remains. If your share value of XYZ Corporation was $1 before the split, you had $200 worth of the stock. Once the reverse split took place, the value of the stock raised to $10 a share, since the second number in the ratio multiplies it. You still own $200 worth of stock but only 20 shares.



Monitoring for Changes

Watch the stock closely for change. Reverse splits often mean the company is taking drastic action to keep the price higher and therefore keep its place on the exchange.

Considerations for Purchases

Look into the history of the stock before you make any purchases. Often novices to the market see a stock price skyrocket overnight without realizing it came from a reverse split. They mistakenly buy the stock while veteran traders sell or simply avoid it.

Checking the stock price history is easy. One place to look is historical stock prices at Yahoo Finance.



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