What the heck is a reverse stock split?
In a regular split, the stock price drops and you get new shares. So if you own 100 shares at $100 a share, and the stock splits two for one, you get 200 shares, and the stock price is $50 a share.
A reverse split is just the opposite: the price increases and you get fewer shares. Thus, if you own 200 shares at a stock price of $50, you end up with 100 shares with a stock price of $100.
RealityChuck has it right but you may wonder why a company would do such a think. Contrary to what some people think, a stocks price means diddly in comparison with other stocks. If Google as a stock price of $200 and Microsoft has shares at $50, that doesn’t mean that Google is bigger than Microsoft. The number of outstanding shares times the price (roughly) would be the number that tells you that.
Companies like to control what their stock is trading at because it has psychological implications. If it is trading at $100 then some might thing it is too expensive so they will have a regular split and everyone now has two $50 shares instead of a single $100 share. Now imagine that their stock is trading at $2.50. That sounds really crappy so they can have a reverse split and consolidate those low value shares into fewer, more expensive ones valued at $20 or whatever else they choose.
There are other reasons they might want to do splits but controlling stock pricing is a big one.
Note that not all companies like stock splitting in any form. Billionaire investor extraordinaire Warren Buffet has always refused to let his investment company, Berkshire Hathaway split and the share price is about to break $100,000 a share.
I might be wrong on this, but I belive that is also used as a sort of trick to for a company to buy back some of their stock. For example, if you own 100 shares and they do a one for two reverse split you now own 50. If the company has a rule that says that all shareholder must have at least 100 shares, they’ll automatically get to buy your shares back. I don’t know much about stocks, but I believe I read something about that when the few shares I own did something like that.
Oftentimes, a reverse split is used by a penny stock company that wants to move into the realm of appearing more legitimate.
RealityChuck explained the basics.
Say you have a stock that trades at $.10. The company is legit but doesn’t want to be perceived any longer as a penny stock. They can do a reverse split at 1 for 20 and immediately the stock is trading at $2.00 instead of 10 cents. Of course, if before the reverse split you owned 1000 shares, you now own 50 shares.
I have never heard of a company with such a rule. Besides I would think that if a split occurred, the company would have to adjust whatever bylaw contains the restriction to adjust for the split.
I would also think it is a rather blatant and illegal form of stock price manipulation. You do something that forces thousands of people to sell at once, which of course sends the stock price tumbling and then buy them back at a lower price. Even the poor overworked folks at the SEC would have a hard time missing that little episode.
This would depend on the stock exchange rules, but I don’t see where it would be a big motivator.
Let’s use a famous example, Berkshire Hathaway (BRK/A) now trades at $98,600/share. Warren Buffet wants to keep the shares in the hands of people that hold for the long term, and feels that a low priced stock lends itself to churning.
One of the Japanese fast food stocks, Yoshinoya D&C (9801) traded at yen182,000. When I worked in Tokyo for Swiss Bank Corp 10+ years ago it was over yen 1 million or around USD10k/share.
I qwned stock that experienced a reverse split. In the letter I received from the company, I was informed it was a strategy to stay afloat. The stock became worthless within a month, when the company when under.
u splld tht wrng, its pwned.
Anyways, it looks like my numbers where off. The example I read talked about a reverse/foward spilt where there would be a 1 for 100 reverse spilt and then a 100 for 1 foward split. If you had less then 100 shares to begin with, after the reverse spilt you’ll have less then one and they can cash you out.
Here’s where I read it.
Reverse splits are also used to keep a company from being delisted, since exchanges have minimum share price requirements to remain listed.
Why isn’t it called a stock join? “Reverse split” is grammaticaly uncrommulent.