How to Calculate a Reverse Stock Split

by Mark Kennan, Demand Media
    A reverse stock split changes the per share price but not the overall value of a company.

    A reverse stock split changes the per share price but not the overall value of a company.

    Stock splits occur when a company issues a certain number of new shares in exchange for each of the old shares, increasing the number of available shares and decreasing the price per share. A reverse stock split does the opposite: it decreases the number of outstanding shares and increases the price per share. However, it doesn't change the percentage of the company that you own or the value of your ownership. Sometimes, companies do a reverse stock split to increase the per share price to avoid being delisted from a stock exchange. After a reverse stock split, you must recalculate both your basis per share and the number of shares you own.

    Step 1

    Look up the ratio of the reverse stock split. A reverse stock split occurs any time shareholders are given fewer new shares than they had in old shares. Examples of reverse stock splits include a 1:2 split, or one new share for every two old shares; and a 1:10 split, or one new share for every 10 old shares.

    Step 2

    Divide the number of shares you owned before the reverse stock split by the number of new shares issued per old share to calculate the number of new shares you own. Suppose you owned 300 shares before a 1:3 stock split. Divide 300 by 3 to find you now owe 100 shares. However, you still own the same percentage of the company because every other shareholder also owns one-third as many shares.

    Step 3

    Multiply your basis -- the price you paid for each share -- by the number of new shares received for each old share to calculate your new per share basis. For example, if you paid $30 per share and the stock did a 1:3 reverse split, multiply $30 by 3 to find your basis for each share is now $90. However, your total basis does not change because you own one-third as many shares.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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