For example, if a stock is trading at 50 cents on the market, and the company declares a two-for-one reverse stock split, then an investor who owned 100 shares worth 50 cents would own 50 shares worth $1 each. Reverse splits are usually done when the share price falls too low, putting it at risk for delisting from an exchange for not meeting certain minimum price requirements. Having a higher share price can also attract certain investors who would not consider penny stocks for their portfolios. They say that the world of finance can be full of jargon, and boy is the phrase a reverse stock split a mouthful. But what actually is this phenomenon and why would a company want to do it?
Stock splits vs reversed stock splits
And the best way to understand a stock split is to use an actual example. Right before its shares were split, the price for a single share of GOOGL stock was roughly $2,250. Shareholders saw a higher share price as a result of the reverse split — but they also saw a reduction in the number of shares they owned, so they didn’t make any extra money. And over the next 12 months, they lost a significant chunk of that money.
Why Would a Company Perform a Reverse Stock Split?
Bond ratings, if provided, are third party opinions on the overall bond’s credit worthiness at the time the rating is assigned. Ratings are not recommendations to purchase, hold, or sell securities, an asset which can be converted into cash immediately and they do not address the market value of securities or their suitability for investment purposes. Also, the company’s actual value doesn’t change immediately after a reverse stock split.
INNOVATE Corp. Announces Extension of Effective Date for Reverse Stock Split to August 8, 2024
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Risks of reverse stock splits
Reverse stock splits occur when the board of directors of a company chooses to reduce the number of outstanding share counts and consolidates them into fewer shares with a higher share price. Since the new share price is raised substantially, the companys total market value remains the same, as does the value of your investment. For exchanges, there is a requirement to remain above a minimum share price. On the New York Stock Exchange, a company would risk being delisted if its share price closed below $1.00 for 30 consecutive trading days.
However, it could also lead to a decline in the stock price as investors may see a reverse split as a sign of problems within the company. When a company implements a reverse stock split, the action reduces the number of outstanding shares and increases share prices in proportion to the old price. Although a shareholder holds a smaller number of shares, the value remains the same as the old amount. The most obvious reason for companies to engage in reverse stock splits is to stay listed on major exchanges.
Walmart, for instance, split its stock 11 times on a 2-for-1 basis between the retailer’s stock-market debut in October 1970 and March 1999. An investor who bought 100 shares in Walmart’s initial public offering (IPO) would have seen that stake grow to 204,800 shares over the next 30 years without any additional purchases. A company’s board of directors can choose to split the stock by any ratio. For example, a stock split may be 2-for-1, 3-for-1, 5-for-1, 10-for-1, 100-for-1, etc. A 3-for-1 stock split means that for every one share held by an investor, there will now be three. In other words, the number of outstanding shares in the market will triple.
If people see the reverse split as a sign of trouble, the company’s stock price might drop. Of course, in the real world not all GE shareholders owned shares in a multiple of eight prior to the reverse split. In these situations, cash was given for any fractional shares that were left over after the 1-for-8 ratio was applied. For example, if you had 20 shares of GE prior to the split, 16 of them would convert into two shares of the split-adjusted stock. The remaining four shares would be removed from your brokerage account, and you would receive cash for their value. In June 2021, General Electric announced a 1-for-8 reverse stock split to reduce its share count and raise its price.
- According to GE, the company had divested (sold) several major components of its business in recent years, but its share count remained the same.
- Furthermore, a reverse stock split can offer opportunities and warnings for those considering entering a position.
- Steve Sosnick, chief strategist at Interactive Brokers and a former trader with Lehman Brothers and Morgan Stanley, says investors would likely see the warning signs early on.
- A stock split reduces the stock price, making the stock more accessible to investors.
Owning shares that have undergone a reverse stock split can be exciting. Unlike other splits, reverse stock splits don’t cause investors to own more shares and increase their holdings, but rather result in owning fewer shares with higher prices. During a reverse stock split, the number of outstanding shares is decreased proportionally while the share price rises in an inverse direction. This does not cause investors to lose value as it essentially represents consolidation of existing investments and resources. Plus, reverse splits can often signify that a company is about to grow, which can make them attractive to potential investors – good news for savvy owners who want to capitalise on reverse splits. For example, if a reverse split is 1-for-5 then that means for every five stocks you own you’ll now have just one – but it will be worth five times more than before.
Well actually, it’s a tool used by companies to seduce potential investors into purchasing stock and by savvy investors who want to maximize their return on investment. The word sounds like something out of a sci-fi movie, but it’s actually a very common financial term you need to know. A stock split is similar to a reverse stock split in that they are both often done to increase investor interest and volume in the stock. One is done because the stock price is too low and the other is done because it is too high.