settoretire wrote: WHY WOULD A COMPANY REVERSE-SPLIT ITS SHARES?
Investors have been trained by Wall Street to expect companies to split their stock, by adding to—not deducting from—their share count. And generally, those kinds of stock splits are good news.
But that’s usually not the case with reverse stock splits. In fact—with a few rare exceptions—reverse stock splits are bad news for investors. Here’s why:
The number one reason for a reverse stock split is because the stock exchanges—like the NYSE or Nasdaq—set minimum price requirements for shares that trade on their exchanges. And when a company’s shares decline to near—or below—that level, the easiest way to stay in compliance with the exchange is to reduce the number of outstanding shares so that the price of the individual shares—like magic—automatically rises. And when that happens, the company’s shares can remain trading on the exchange.
Of course, while the shares may get an initial boost, don’t expect it to last. If a company’s fortunes—and shares—have been waning, savvy investors will see the reverse split as a big red flag and continue selling, sending the share price back down.
Most—although not all—reverse stock splits are seen in small penny stocks that have not been able to attain steady profitability and create value for their shareholders. I found that was the case in most of the biotechs’ recent reverse stock splits. Many are on the verge of bankruptcy, and they use a reverse split as a last-ditch effort to revive their failing fortunes.
But sometimes, companies will affect a reverse stock split so that their shares trade higher, with the intention of making them more attractive to mainstream investors and/or to ease the way to listing on a national exchange.