Skip to main content

Is reverse split good or bad?


Reverse stock split reduces number of outstanding shares in a predetermined ratio. It is also known as stock consolidation, share rollback or stock merger because two or more shares are merged into one more valuable share. Reverse split is considered to be a corporate action, meaning action that is affecting share price and needs to be approved by the company's board of directors and possibly by voting shareholders. Company can even get additional letter D to its ticker signifying that it is going through reverse split.

Number of total outstanding shares, which includes shares currently held by all shareholders, including institutional investors and restricted shares, is usually divided with 5 or 10 getting ratio one for five or one for ten but it can be as little as one to two or big as one to hundred. For example if you have 100 shares worth $1 each so you have $100 worth of shares. if a company is going for one for then reverse split, you will receive ten shares, each worth $10. As you van see no real value is added with this action, you still have the same $100 worth of shares, you just hold fewer but more valuable shares; market capitalization is the same.

The question is why the company chooses to do the reverse split and what are the repercussions of such action. The most common scenario is that company is trying not to get delisted from a stock exchange that have minimum bid price requirements. Nasdaq for example will delists companies that trade below $1 for certain period of time. If that happens only place to trade the stock is over the counter market (OTC) in penny stock section. There is prestige that comes with being listed on a major exchange and it certainly attracts many institutional investors and mutual funds so it is easy to understand why company doesn't want to lose that status. With reducing number of shares comes the reduction of number of shareholders which can be useful if company needs to reduce that number for certain regulation or if a company wants to go private.  If you have a public company you naturally want to draw positive attention and attract as many shareholders as you could. Having stock that that is on a higher price side will draw more attention from analysts an subsequently investors. Typically, share price must be above $5 for options to be traded on the stock.

Reverse stock split can be considered as a sign of a struggling company that is trying to avoid delisting but it can be used in a positive way to help company transition to trading on exchange.Smaller number of shares are certainly more appealing to investors in contrast to stock split which dilutes their ownership. If investors perceive it negatively, nothing more than a smoke screen share price can drop to initial value. In case that reverse split is accompanied by positive changes in corporate structure and strategy there is a chance that company is on a good path.
Labels:

Comments

Post a Comment

Popular posts from this blog

OTC stocks more difficult to trade and deposit

  Mina Mar Group helps micro-cap companies structure their growth. Micro-capitalized companies are those with less than $50,000,000 in equity, sometimes under $1,000,000. Restructuring involves raising money (both debt and stock), and planning how they will eventually harvest that wealth. If you’re a founder or investor, the secret to harvesting your equity is to possess assets with a developed market for their sale; up until recently, that market was the public market. Now, Over-The-Counter Securities (“OTC Securities”) don’t serve that purpose since, unless you’re a tech unicorn doing an IPO, there are essentially no ways to sell the shares you’ve invested in. OTC securities – how they were deposited five years ago. Brokerages all around the country have tightened compliance over the past five years to the point where no one may deposit share certificates into their brokerage accounts, even if they can prove that they paid for them. Consider the following demand from a secondary brok
Post a Comment
Read more

S1 Registration

A Form S1 represents the opening registration that a US firm must submit with the SEC prior to an Initial Public Offering. The Securities Act requires a registration statement, otherwise known as Securities and Exchange Commission Form S1, previous to security can be issued on a public exchange such as the NASDAQ, NYSE, or other exchanges. Foreign corporations can register with the SEC, but they must do so using the SEC Form F1. Corporations must fill out Form S1 to outline their intended use of capital proceeds, a description of their current business strategy and competition, and a brief prospectus for the new security, including offering pricing mechanism and any other dilution to other listed stocks.  The SEC also mandates that any material business conducted between the corporations and its directors and external counsel be disclosed. Investors can access S1 filings online in order to do due diligence on new offers before they go public.  As a result, businesses can use the SEC’s
Post a Comment
Read more

Foreign Companies

Lately, we are getting many inquiries about dual listing or to list foreign companies either through IPO or RTO on OTCmarket. What are the benefits for foreign companies to be listed on OTC markets and how they can do that?  Is it an easy procedure, and what are the conditions? What is the main reason for companies that are listed on qualified foreign exchanges to trade on OTC markets? We are here to cater to your questions by providing you with the right answers. The first thing we need to start with is that this market is a global market. Only that fact gives you countless opportunities. To be listed on Wall Street which represents a vital center of global finance, for early-stage growth companies, and having access to US investors can bring a significant competitive advantage. It is appropriate for small businesses due to its regulatory structure, which gives better transparency and accessibility to a bigger pool of less risk-averse and more active investors. This is important for s
Post a Comment
Read more