What is a Reverse Stock Split?
A Reverse Stock Split is when a company attempts to increase the dollar price per share of its stock by reducing the amount of shares out in the market. Companies often conduct a reverse stock split in order to prevent the stock from falling below a point where it jeopardizes its ability to be listed on an exchange. Generally, these reverse splits happen when a stock approaches or falls below $1 per share.
Reverse stock splits always have an associated split factor, which is represented as 1:X. Meaning for every X shares you have, you will now instead own 1 share that is now worth X times more than it was before the split.
The most important thing to remember is that while the share price will change, there is no impact on the market value of the company (or your holdings) as a result of a reverse stock split. The market value of a company is determined by multiplying the price per share by the number of shares outstanding. When a company goes through a reverse stock split, the number of shares decreases and the price per share increases in the same proportional amount.
Lets take a look at an example*:
Say you have 4 shares of ABC trading at $ 0.25 per share, your total investment value is 4 shares x $0.25 = $1.00. The company conducts a reverse split and you now have 1 share at $1 per share. The total investment value is still $1.00 (1 share x $1.00). Your investment value does not change. It is similar to exchanging quarters into a dollar. 4 quarters still make up a dollar or you can just hold one dollar bill.
*Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy
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