Company A decides to do a reverse stock split and reduces the number of shares by, say 10 to 1.

Before the reverse split I only owned 7 Stocks on that company. How will this reverse stock split affect me? Will I now own only 0.7 shares, or what will happen with my shares?

  • Very importantly, you're confusing "stocks" with "shares". They're fundamentally different. (I've edited the question to make clear what you're referring to.) – RonJohn Dec 17 '20 at 14:08
  • I believe that method was (at least) once used to force a partial owner out -- they had only a few shares each (total number of shares was only a handful) and the unwanted partner's partial shares were retired for some consideration. – Spehro Pefhany Dec 18 '20 at 2:44

You would end up with cash in your account with the value of 0.7 shares at the time of the reverse split. In other words, your shares would be forcibly sold.

Since forward and reverse splits are announced in advance, if you want to prevent your shares from being sold, you would need to buy 3 additional shares before the split so that you'd be left with 1 share after the split.

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    I have no reference right now, but I recall a situation where a company doing such a split set a minimum holding, say 100 shares, in order to receive new shares. Consider, each shareholder has a cost to the company, printing and mailing annual reports can be high if there are tens of thousands of single share stock holders. – JTP - Apologise to Monica Dec 17 '20 at 12:54
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    @JTP-ApologisetoMonica Pretty much. There are only really 2 common reasons why companies do a reverse split: Because they want to increase the price-per-share. Or because they want to decrease the number of shareholders. Both usually by at least an order of magnitude. – Kaz Dec 17 '20 at 18:14
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    @JTP-ApologisetoMonica: May've been this question? An answer linked this specific case, but looks like that was a 30,000-to-1 merge, followed by a 1-to-30,000 split, essentially forcing out shareholders with fewer than 30,000. – Nat Dec 17 '20 at 23:47
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    Just some added nuance... The desire to increase share price tends to be for the purpose of maintaining an exchange listing. – Bob Baerker Dec 18 '20 at 0:37

How your fractional shares are handled after a reverse split depends on the company and your broker.

Some companies give you nothing. Some companies round up to the nearest whole share. Most of the time, fractional shares are eliminated and you receive a payment-in-lieu for them (cash).

If your broker offers the ability to trade fractional shares then there's no problem. Some brokers will sell your soon to be fractional shares before the split.

  • Is it possible to own fractional shares of a company? (I thought that was only possible with mutual funds and ETFs. – RonJohn Dec 17 '20 at 14:11
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    Many brokers now offer fractional share trading: Robinhood, Interactive Brokers, Fidelity, Schwab, etc. Some have limitations: Some ETFs and/or stocks, stocks and ETFs over $1, all listed stocks. Google for details, if interested. – Bob Baerker Dec 17 '20 at 14:18
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    @BobBaerker in those cases doesn't the fractional share only exist within the brokers system. As far as Company A is concerned the broker owns N shares of the stock, that the broker is allocating them to its customers fractionally is irrelevant to A; and only matters to the broker to the extent that if after the reverse split they might have to buy an additional new share to fully cover their fractional customers. – Dan Is Fiddling By Firelight Dec 17 '20 at 18:11
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    @Dan Is Fiddling By Firelight - Yes, fractional shares only exist within the brokers system. And yes, after the reverse split they might have to buy an additional new share to fully cover their fractional customers. But it could be offsetting if they go short the share (100's maybe 1000's of different fractional shares positions across all accounts). Bear in mind that this is pocket change. A year ago many brokers stopped charging commissions. How can they stay in business? Because the bulk of their revenue comes from other sources. AUM is their need and fractional contributes to that. – Bob Baerker Dec 17 '20 at 18:19
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    Here are 20 examples of stocks that underwent reverse splits and the fractional shares shares were rounded down (some if any amount of fractional, some if less than 0.5 shares) – Bob Baerker Dec 18 '20 at 0:12

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