Roollback / Reverse splitsBeware the Pitfalls of Pink Sheet Stocks &Reverse Splits
ByBob Blick
Source:
https://ezinearticles.com/?Beware-the-Pitfalls-of-Pink-Sheet-Stocks-and-Reverse-Splits&id=1527687
Who hasn't dreamed of making it big in the stock market? You hear allthe time about people who invested in start up companies and made a lot ofmoney. I am sure you would have loved to have been an earlier investor inWalMart or Microsoft?
The allure of this dream attracts investors to pinksheets. These stockscan be bought extremely cheap. You might be able to buy 200,000 shares for $100or less. Then you hope that company moves forward and the shares make a climbto a buck a share, and you prosper.
That can happen if you are very lucky. However, beware investing inpinksheet companies. Do so only with money you can afford to lose.
First, because the price is so cheap, you might be tempted to investwithout taking the time to thoroughly investigate the company and see if it hasa strong basis to enable it to grow. Big mistake.
These pinksheet companies are not regulated like companies offeringregular stock, so first do some homework and learn exactly what pinksheetsinvolve. The purpose here is to make you aware of something called reversesplits, which can happen with any stock but are prevalent with pink sheets.
A reverse split actually reduces the number of shares you own in thecompany. Sometime by a lot! For example, you might own 300,000 shares ofcompany ABC. The company decides to make their stock more attractive byreducing the number of shares it offers and making the price per share higher.So they may do a 100,000 to 1 reverse split, as an example.
Let's say you have 300,000 shares and the shares are worth a total of$9. Very possible. You bought in at $100 but it is now worth $9. Well, you hopemaybe it climbs to even a penny a share and you can walk away with $3,000.Originally you hoped to get rich but now you figure you will be happy to turnyour $100 into 3 grand.
The reverse split comes along and you now have 3 shares. Each share isnow worth $3. Terrific. You still have stock worth $9, but now to even get backthe original $100 you invested, your shares will need to grown to a bit over$33! That does not even take into account what it cost to buy the stocks and tosell the stocks through your broker.
Well, what are your chances now of getting rich, or even making a niceprofit on your original investment? Pretty much nil.
This happens frequently. It has happened to me 5 times so far. Theexample above is actually from my experience and, by the way, that stock is nowback to being worth $.0001 a share. Seriously!
If you are lucky, maybe the reverse split will be small and you willstill have shares to work with. I have a 4 - 1 reverse split coming up, so my20,000 shares will become 5,000 shares. I can live with that but I don't haveto be happy about it.
This has not stopped me from investing in pinksheets, but it hasdefinitely made me more cautious. I know not to get carried away and buy toomuch from any one company and generally limit the investment to around $50 -$100, depending on what the company research shows.
I think this is something you need to understand thoroughly. I've beenon way too many stock bulletin boards where people had no idea of what areverse split was. Believe me, once it happens to you, you will never forgetit.
To wrap it up, if you decide to invest in pinksheet companies, or inpenny stocks, take the time to do your research and invest only money you canafford to lose. Do so and a loss won't hurt you but maybe you can get lucky andmake some money.
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Bob Blick is the owner and webmaster of the Investment Digest website. You will find lots of information and tips at this site to help you invest wisely. You will get thorough information on everything from investing to making money in foreclosures to planning for retirement and more. It is well worth your time to visit and absorb this well covered information.
Article Source: https://EzineArticles.com/?expert=Bob_Blick
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Do Reverse Splits Ever Work?
By Dan Caplinger |
July 2, 2009 |
Source: https://www.fool.com/investing/general/2009/07/02/do-reverse-splits-ever-work.aspx
When stocks perform well,an announcement of a coming stock split can makeinvestors even more optimistic about the future. In the uncertain market environmentwe're facing now, however, many companies either have already made or areconsidering reverse stock splits to boost their share prices from extremely lowlevels.
Still, investors have to wonder: Will reverse splitsdo any good, or are they basically the kiss of deathfor a company?
A sordid history
AIG(NYSE:AIG) is the latest company to implementa reverse split,but it won't be the last. With many major companies trading in the single digits,reverse splits may be necessary to boost stock prices back up to a level atwhich they don't look like penny stocks.
By themselves, splits shouldn't make any real difference. Whetherregular or reverse, a split simply changes the number of shares outstanding.Offer two shares for every one existing share, and the price for each shouldget cut in half. Issue one new share for every 10 currently outstanding, andeach share's price should multiply by 10. The net value should remain the same.
Nevertheless, reverse splits have not worked out well for many companiesthat have used them in the past. SunMicrosystems(Nasdaq: JAVA), for instance, did a 1-for-4reverse stock split back in November 2007. A year later, the stock had droppedmore than 85% before it turned around. Even after Oracle's (Nasdaq: ORCL)takeover bidfor the stock, shareholders stand to receive less than half of what sharestraded for at the time of the reverse split.
Similarly, in September 2006, Ciena(Nasdaq: CIEN) made a 1-for-7 reverse split.Although shares are currently back in the double digits, they're still downmore than 65% from when the split took place.
Bright spots
As it turns out, not allreverse splits have been failures. Take a look at these stocks, whichsuccessfully recovered from reverse splits:
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Stock
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Date of Reverse Split
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Return Since Reverse Split
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Palm(Nasdaq: PALM)
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Oct. 15, 2002 (1-for-20)
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633%
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priceline.com(Nasdaq: PCLN)
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June 16, 2003 (1-for-6)
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347%
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Laboratory Corporation of America(NYSE: LH)
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May 4, 2000 (1-for-10)
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330%
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Corrections Corporation of America
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May 18, 2001 (1-for-10)
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483%
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Brightpoint
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June 27, 2002 (1-for-7)
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1,788%
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Source:Yahoo! Finance.
More broadly, however, recent research suggests that investing in acompany that has just done a reverse split is a losing proposition. Accordingto a 2006 paper that looked at 1,600 reverse-split stocks between 1962 and2001, such stocks substantially underperformed the overall market during thethree-year period following the reverse split -- by an average of 1.3percentage points per month.
Focus on fundamentals
None of this should come as any great surprise. For a company's stock to tradelow enough that it'll even consider a reverse split, it typically has to endurea terrible periodof financial results. The split itself doesn't solve the operational problems acompany faces, so companies that can't find a way to recover simply fail. Thefew that do find permanent solutions to their problems may have spectacularruns, but from an overall return perspective, they simply can't outweigh thevast majority of firms that fail.
Stocks that choose to undertake reverse splits brand themselves with ared flag. Given their reputation as wealth-killers, reverse splits simply driveaway many investors from ever considering a given stock. If that aversionproves to be irrational -- that is, if investors abandon the stock for dead,even after its business prospects revive -- then it can be potentially quitelucrative for those who keep their eyes opento the opportunities it presents.
All other things being equal, though, companies that get themselves intoa position where they need a reverse split have a lot against them from thestart. Except in the most extraordinary cases, therefore, investors may besmarter to seek better investments elsewhere.