Reverse Split Arbitrage

Usually when I hear somebody advertising an easy way to make a 10 percent return on my investment I get a little weary. When I hear I can make a 20 percent return alarm bells start going off. But when I hear I can make a 1000% return? We’ll that’s when I know I’m dealing with a scam.. Or at least, that’s what I thought…

A year and a half ago I embarked down the road of ‘Reverse Split Arbitrage’. I saw a Reddit post advertising a way to make a 1000% return on my investment in a matter of days. While suspicious, it piqued my interest. I tried it out. It blew my mind that it worked.

The concept is simple. When a stock price rises above its desired target price, the company often chooses to ‘split’ the stock to return the stock price back to an optimal level. This is called a stock split. It’s the reason stocks often cost less than $100 to buy. Stocks that don’t split wind up like Berkshire Hathaway. (A stock that has never split and has a share price of $443,112). Investors tend to shy away from these stocks because of the high price tag. If a stock is more affordable, more investors can buy it, driving up the stock price and demand. So when a company’s stock price rises too high, they split. If you held 1 share before a stock split, you would wind up with multiple shares after the split.

Likewise, when a stock price drops below a desired level the company might perform what’s called a ‘reverse split’ to raise the stock price. Reverse splits can be done for a couple of reasons. One primary reason is that stocks will be delisted from the New York Stock Exchange if their share price drops below $1 for too long. Companies are forced to do a reverse split to raise their share price above $1 to keep from being delisted. Another reason they might do a reverse split is because investors tend to shy away from penny stocks. They are viewed as risky and not a good investment (and for good reason). Usually companies do a reverse split because they aren’t doing well and so a reverse split is a way to support the price level of their stock.

When a reverse split happens, For every x number of shares of stock you hold before the split, you wind up with 1 share after the split. For example if a company did a 10 for 1 reverse split, and the pre split stock price was $.10, and you spent $1 to buy 10 shares per-split, after the split you would have just 1 share valued at $1. The trick comes into play when you have fewer shares than are being reverse split’ed. For instance say you only possessed 1 share of the company’s stock pre-reverse split. The company now has to decide what to do with you. Do they give you cash-in-lieu (buy out your share and pay you cash instead), do they give you a fractional share? Or do they round up your ownership to the nearest whole share post split? Oftentimes, for simplicity’s sake, they do the later. In the above example if you spent $.10 to buy 1 share before the stock split, you would wind up with 1 share worth $1 after the stock split. You’ve just made a safe, easy, legal 1000% gain. Sure, there’s a pretty big catch here. Even though you’re making a huge gain, the total amount of money gained is usually relatively small (although occasionally you can make hundreds of dollars off plays like this).

Maybe you aren’t too impressed that you just made a free $.90. Whoopdie doo. But what if you have 10 brokerage accounts? Then you’ve made $9. And what if trades like this happened several times a month? You might be able to make $50-$100 a month off these kinds of trades. Sure it isn’t huge, but it’s essentially free money, and definitely the easiest way I’ve ever heard of to make a 1000% return in less than a week.

In the past 18 months I’ve made about $800 off of trades like this. Recent successful trades have been AVTX, MTC, BRQS, and PETZ. I have lost money at times. No investment is ever without risk, and sometimes companies opt not to round up their shares even when they say they will (or else they round up a brokerage’s shares, but not the individual account owner’s shares). But when the capital investment required is less than $1 most people can stomach that kind of risk.

Today for instance (August 4th) there is a 6-for-1 reverse split of USWS. The current stock price is $.95. (Meaning the stock price should be $5.70 tommorrow) I bought a share in each of my 8 brokerage accounts and stand to gain $4.75 per account ($38 total). If you want to try it out yourself you could also purchase a share of this stock. Just make sure you do it before market close today (And remember that you do so at your own risk. All information contained in this article is my own opinion and should not constitute financial advice)

*Be weary that some brokerages charge fees when companies perform ‘corporate actions’ -stock splits, reverse splits, ticket changes and etc. so be careful which brokerages you use to buy these stocks in. Brokerages like schwab, fidelity, tastyworks, Robinhood, and webull do not charge these fees (Or at least they never have when I’ve used them in the past). Please try this at your own discretion. No investment is risk free and there is no guarantee that you will make money off of a reverse split. Invest at your own risk

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