When it comes to the question of reverse splits being good or bad for a company’s stock price, it is not that hard to tell that it will end in a bad outcome. When you hear of a reverse split happening in a company that you own, you usually go into panic mode and think of all the money you are going to lose and become angry with the company. But before you decide to jump ship and sell your stocks in a certain company that has a split, at least understand and evaluate if you need to sell your position.
What Is A Reverse Split?
A reverse split is a company reducing the amount of shares to increase their stock price. When a split happens, the market capitalization stays the same. It does not change because the market value of the total amount of shares is still the same. All that changed was the amount of shares and the price of those shares. An example of this would be company XYZ trading at 50 cents a share with 20,000 outstanding shares. The company does a 1-2 split and trades at $1 a share with 10,000 outstanding shares. That market capitalization is still $10,000 no matter if the company does a split or not.
Reasons For A Reverse Split?
Companies will want to do a reverse split for many reasons. But the most common reasons are:
- OTCBB stocks can move up to the NASDAQ stock exchange depending on the size of the split
- Companies trading on the NASDAQ might do a split to stay on the exchange and avoid being delisted for not meeting the minimum price requirement.
You should be very careful when staying with a company through a reverse split because, most of the time, the stock price will start to drop after the split. Companies will use these splits as a last resort to keep their company from being delisted from an exchange so you should evaluate the company very carefully when deciding if you are going to keep your shares in the company. The only situation I can see a good outcome from a reverse split would be a OTCBB stock uplisting to the NASDAQ. But generally, splits are bad news for the company and also for you if you are a shareholder in that company.