What Does It Mean If Shares of Stock Are Cut in Half?
When shares of stock are cut in half, it's commonly referred to as a reverse stock split. In a one-for-two reverse stock split, a shareholder who owns 100 shares of a company's stock ends up owning only 50 shares. In that scenario, the company gives the investor one share of stock for every two shares the investor owns.
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Function
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A reverse split causes the price of a stock to increase. Although shareholders appear to own a more valuable stock following a reverse stock split, the portfolio value of the stock doesn't change. For instance, if an investor owns 100 shares of stock valued at $5 a share, a one-for-two reverse split would result in owning 50 shares valued at $10 per share.
Significance
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When shares of stock are cut in half, it doesn't affect a company's market capitalization. A reverse stock split reduces the total number of shares a company has outstanding and increases the value of the shares; however, the total market value of the company's stock doesn't change.
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Considerations
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When companies vote for a reverse stock split, it might cause some investors to cash out if they end up owning less than a share of stock. For example, if a shareholder owns 60 shares of stock and the company decides on a one-for-100 reverse split, that shareholder would end up with less than a full share of the stock and get cashed out.
Reverse/Forward Stock Splits
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Sometimes companies want to weed out small investors and do a reverse/forward stock split. The board of directors could vote to exchange one share of the company stock for every 100 owned by investors; those investors with fewer than 100 shares would be cashed out. The company would then do a forward stock split, issuing 100 shares for each one share owned by investors, which would bring the number of shares back to where it was.
Warning
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It could be a signal that a company is having financial trouble if its board of directors votes for a reverse stock split. A reverse stock split can artificially raise a company's share price and prevent it from being delisted from a stock exchange that requires a minimum share price.
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