Many investors panic when they see their share count drop overnight, but in most cases, this is just a reverse stock split in action.
If you’re trading foreign stocks through platforms like Trove, you might have already experienced this. But what exactly is a reverse stock split, and why do companies do it? More importantly, how does it impact you as an investor?
I’m here to break it all down in plain, simple terms—no complicated Wall Street jargon, just the key facts you need to know. Let’s dive in.
What is a Reverse Stock Split?
A reverse stock split is when a company reduces the number of its outstanding shares while increasing the price per share. The total value of your investment doesn’t change—it’s just restructured.
Let’s say you own 100 shares of a stock priced at $1 each. If the company announces a 1-for-10 reverse stock split, it means for every 10 shares you own, you’ll now have 1. After the split, you’ll have 10 shares instead of 100, but each will be worth $10 instead of $1.
Your total investment remains $100—nothing changes except the number of shares and the price per share.
Why would a company perform a reverse stock split?
Companies don’t just wake up and decide to reduce their shares for no reason. A reverse stock split is often a strategic move—but sometimes, it’s a red flag. Here are the main reasons why companies do it:
1. To Avoid Delisting
Major stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ have minimum price requirements. If a stock’s price falls too low (often below $1), it risks getting delisted. A reverse stock split helps companies meet these requirements and stay listed.
2. To Improve Perception
Let’s be honest—investors don’t always take low-priced stocks seriously. Stocks priced at pennies per share can look risky or unstable. By increasing the stock price through a reverse split, companies hope to attract big investors who usually avoid penny stocks.
3. To Restructure Before a Merger or Acquisition
If a company is preparing for a merger, acquisition, or major restructuring, it might use a reverse stock split to clean up its share structure before making big moves.
But here’s the catch: Reverse stock splits sometimes are often seen as a warning sign—many struggling companies use them as a last resort.
So, should you be worried when this happens? Well let’s look at how it affects your investment.
What is the Impact of Reverse Splits on Shareholders?
If a company you’ve invested in announces a reverse stock split, here’s what it means for you:
1. Your Investment Value Stays the Same
The total value of your shares remains unchanged. You’ll own fewer shares, but each share will be worth more.
2. Liquidity May Decrease
Since there are fewer shares available for trading, it might become harder to buy or sell them quickly.
3. Market Reaction Can Be Negative
Many investors see a reverse stock split as a sign of financial trouble, especially if a company does it to avoid delisting. Stocks often drop in price after a reverse split, so it’s important to monitor the situation.
What You Should Do When a Reverse Stock Split Happens
1. Stay Informed: Before making any decisions, read the company’s announcement and understand why the split is happening. If a company is doing it for strategic reasons, it may not be a bad sign.
2. Evaluate the Company’s Fundamentals: A reverse stock split alone doesn’t mean a company is failing—but if it’s combined with poor financials, it could be a red flag. Do your research before deciding to hold, buy, or sell.
3. Monitor Stock Performance: Stocks often drop after a reverse split—so if you’re planning to invest, wait and watch how the market reacts.
4. Check With Your Brokerage: If you own fractional shares, check whether your brokerage will convert them or cash them out.
5. Don’t Panic: Reverse stock splits can be confusing, but they don’t automatically mean a company is in trouble. Take your time to analyze the situation before making any investment decisions.
Conclusion
A reverse stock split is simply a company reducing the number of shares while increasing the price per share. It doesn’t change the total value of your investment, but it can impact liquidity, market perception, and fractional shares—especially if you’re a Nigerian investor trading foreign stocks.
When a reverse split happens, don’t panic—stay informed, check the company’s financials, and monitor market trends before making any moves. And if you’re trading through platforms like Trove, , or , make sure to check how your brokerage handles fractional shares and stock adjustments.
At the end of the day, investing is all about knowledge—so the more you understand, the better your financial decisions will be.
