Say a company needs to increase share price, often to stay listed on an exchange. To do this, they announce that 10 shares will now be consolidated into 1 share, which has the effect of increasing the price per share about 10x. (The exact ratio may differ.) So if you had 10 shares before the split, you’d now have 1 share that’s worth ten times as much. That’s a reverse split.
But what if you only had 1 share to begin with? Now you’d have 1/10 of a share, a fraction which historically could not be traded. To get around fractional shares, companies will sometimes pay you the cash value of the fractional share. Other times, though, they will round you up to one full share. When they round up, the share you had bought for $0.50 is now worth around $5. You profit $4.50 with almost no risk. This is reverse split arbitrage.
Once you understand them, trading reverse splits that round up fractional shares is easy. There are four steps:
- Get a broker.
- Sign up for notifications.
- Buy the stock.
- Sell stock (optional).
1. Get a broker
For a first broker, I recommend Webull as you they offer the best sign up bonus. Deposit $100 and get two free stocks worth $10–$1850. That’s an immediate 10% return! Plus Webull allows late trading until 8pm, giving you an extra 4 hours to place orders. As you get more comfortable and want to start trading more obscure stocks that split more often, look into Firstrade or Schwab.
2. Sign up for notifications
3. When the alerts come in, decide if you want to buy
4. Sell the stock (optional)
Sometime after the reverse split, one of two things will happen: either the new rounded up share will reappear back in your account ready to sell, OR the value of the fractional share will be converted to cash and deposited into your account (this is called cash-in-lieu). Both processes can take between a day and six weeks or more depending on the broker and when they are able to get to it. The majority take about 2–3 days to process. You can sell the stock immediately and invest in something else, or hold and see how it does.
That’s it! Use the links to sign up for notifications of upcoming reverse splits that round up, and sign up with a brokerage and fund an account.