On August 15, SinglePoint, a Phoenix-based renewable energy holding company, conducted a 100-for-1 reverse stock split.

A reverse stock split involves combining a company’s existing shares into fewer, more valuable shares (market capitalization remains unchanged). This maneuver is rare among large, stable companies and is more typical of companies struggling to maintain their listing on exchanges with minimum price requirements.

Typically, performing a reverse stock split is straightforward. You do a quick calculation, adjust the stock prices, and update the share count on the brokers’ books. And it’s done.

But not all reverse stock splits are the same, and most aren’t as drastic as this one. That left SinglePoint stock vulnerable to some scams.

There’s a trick that can potentially make free money in the stock market with reverse stock splits, but it’s not without risk. If you decide to try it, you could end up losing your brokerage account. Here’s how it works: Consider SinglePoint’s 100:1 reverse stock split. If you own 100 shares, you get one share back in return. But what if you only own one share? Mathematically, you’d expect to get 1% of a share back. However, some brokers don’t trade fractional shares, especially in smaller companies. And even if they did, SinglePoint stated in its announcement of the reverse stock split that “no fractional shares will be issued.”

So what happened in this case was that a person who owned only one share before the split ended up with a full, post-split adjusted share that was 100 times larger than what he had before.

Reverse stock splits can result in the issuance of some additional shares — usually an insignificant amount. However, SinglePoint predicted that the result would be far from insignificant. The company expected the rounding up to result in the issuance of a “significant amount of additional common stock.”

The 100:1 ratio in SinglePoint’s reverse stock split was so high that it might have made rounding effects exploitable. The day before the reverse stock split went into effect, the stock traded at a reverse stock split-adjusted price of $8.58. By Tuesday, it had plummeted to below $1 – a drop of nearly 90% – with no further news.

SinglePoint CEO Wil Ralston said on X on Tuesday that he suspected the rounding mechanism had been manipulated using an algorithm, unexpectedly increasing the share count and contributing to the dramatic decline in the stock price.

Ralston says the company is investigating what happened, but acknowledges there’s probably not much it can do to make amends for what happened. When asked why they decided to round up and avoid fractional shares, he says it was intended as a benefit to SinglePoint’s long-term shareholders.

“This should not have been exploited,” he says, pointing out that brokers typically block the accounts of people who try to capitalize on such situations.

Online forums where day traders gather are full of discussions about when and how to capitalize on similar situations. But these forums are also full of horror stories from people who were caught by their brokers. The consequences they say they faced were severe, ranging from closing their accounts to restrictive measures on their trading activities – such as bans on short selling, options or trading penny stocks.

“Don’t do this,” wrote one Reddit user in April. “I thought it was free money until my accounts were closed and I had to withdraw everything and pay the tax penalties. There is no such thing as free money.”