Should I sell my stock before a reverse split?
Selling before a reverse stock split is a good idea, but selling after the reverse stock split is not. Since you can sell before and after a reverse stock split, selling during one is optional. The main advantage of selling before the reverse stock split is that you don't have to wait around for it to happen.
That said, many stocks have shown strong performance after a split. In other words, selling your shares of a stock prior to a split isn't always the best decision – unless, of course, you're not well-positioned to continue holding the stock.
Key Takeaways. A reverse stock split consolidates the number of existing shares of stock held by shareholders into fewer shares. A reverse stock split does not directly impact a company's value (only its stock price). It can signal a company in distress since it raises the value of otherwise low-priced shares.
A reverse stock split has no immediate effect on the company's value, as its market capitalization remains the same after it's executed. However, it often leads to a drop in the stock's market price as investors see it as a sign of financial weakness.
If you own 50 shares of a company valued at $10 per share, your investment is worth $500. In a 1-for-5 reverse stock split, you would instead own 10 shares (divide the number of your shares by five) and the share price would increase to $50 per share (multiply the share price by five).
Reverse Splits Aren't All Bad
There are examples of stocks that have prospered after doing so, including Citigroup (C). Citi probably had the most famous reverse split—a 1 for 10 reverse split in May 2011. Citi became a $40 stock and is now trading at $55.
A reverse split isn't necessarily good or bad by itself. It is simply a change in the stock structure of a business and doesn't change anything related to the business itself. That said, a reverse split is usually taken as a sign of trouble by the market, and most of the time it isn't done for a positive reason.
An Important Cue from Financial Execs
It tells the investing public that the company is confident that their stock will rise back to the pre-split level and is generally seen as a bullish signal by investors who in turn tend to take the stock higher.
Regular and reverse stock splits do not change the value of one's position, only the number or shares outstanding. They do not trigger short squeezes. To the extent that they might, I would suggest that reverse-splits are a way for a very weak stock to push its price up so that the stock doesn't get delisted.
Reverse splits also can diminish or force out small investors, who may not have enough shares to be consolidated. For example, if a company decided on a 1-for-50 reverse split, any holders of fewer than 50 shares wouldn't be offered a fractional new share. They would instead be paid cash for their shares.
Is a reverse stock split always bad?
Whether a reverse stock split is good or bad depends on the company's financial situation and goals. A reverse stock split may create opportunities for growth or result in losses if the new price doesn't hold.
Some companies may only conduct a reverse split once, while others may do it multiple times. Reverse splits are more common among small-cap stocks than large-cap stocks.
- Walmart (NYSE:WMT) recently surprised the market by splitting its stock 3-for-1. ...
- At $554 a share, Ulta Beauty (NASDAQ:ULTA) is primed for a price cut via a stock split. ...
- Broadcom (NASDAQ:AVGO) would be a perfect candidate for a stock split in 2024.
Once approved, investors will receive one share for every 200 shares they own. So, if you owned 5,000 shares of stock at a price of 10 cents per share worth a total of $500 before the reverse split, you would own 25 shares at a price of $20 each after the reverse split, maintaining that total value of $500.
Prevent being delisted
Being listed on an exchange is important to ensuring public trust in a company, maintaining investor interest and raising capital. A reverse split can be a quick way to push the share price above the exchange's required level for continued listing.
A company may declare a reverse stock split in an effort to increase the trading price of its shares – for example, when it believes the trading price is too low to attract investors to purchase shares, or in an attempt to regain compliance with minimum bid price requirements of an exchange on which its shares trade.
Reverse stock splits are rare in today's stock market in part because of their controversial nature. A reverse stock split reduces a company's outstanding shares. It's the opposite of a regular, or forward, stock split in which a company increases its shares.
From time to time, stock splits are followed by a bump in stock performance—but not always. Is the split worth it? – Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices.
Reverse stock split as a strategy to avoid delisting: A reverse stock split is often used as a strategy to avoid delisting. By reducing the number of outstanding shares, the reverse split can increase the stock price and help the company meet the exchange's minimum price requirement.
For example, if most shareholders of a stock own fewer than 1,000 shares, the company can do a 1:1,000 reverse split and squeeze out the investors who own fewer shares by paying them for their holdings. Those shareholders would either have to accept that price or buy more shares to total 1,000.
Is reverse split bearish?
A reverse stock split involves combining multiple shares of stock into a single share, reducing a company's total number of shares and increasing its share price by a specific multiple. While a standard forward stock split is generally considered bullish, a reverse stock split is typically considered bearish.
Disadvantages of a Stock Split
The company wanting to split their stock must pay a great deal to have no movement in its over market capitalization value. A stock split isn't worthless, but it doesn't impact the fundamental position of a company and therefore doesn't create additional value.
In a reverse stock split, the share count drops and the share price rises. A 1-for-10 reverse split like AMC's should slash the share count to 10% and add a zero to the stock price.
A reverse stock split may be used to reduce the number of shareholders. If a company completes a reverse split in which 1 new share is issued for every 100 old shares, any investor holding fewer than 100 shares would simply receive a cash payment.
Listing Rule 5250(b)(4) will require companies to provide public notice of a reverse split, using a Reg FD-compliant method, no later than 12:00 p.m. ET at least two business days prior to the proposed market effective date.
