Companies use stock reverse splits to retain share value that is declining.
Pros Of Reverse Stock Split
The video provided by UK Spreadbetting shows this process does not really have a great impact on shareholders because it is more of a tool for corporations to employ. The one major upside to performing a reverse stock split lies in the ability to have your company’s shares traded on the stock market. Most major stock exchanges have a minimum price point to be listed. For instance, in the case of the NASDAQ, shares must maintain a buy price of $1.00 to stay listed. If the equity falls below that price point for more than 30 days the stock runs the risk of being delisted.
Delisting & Relisting
Companies delisted for low share value or other reasons get removed from their exchange. This change means they can no longer be traded through official brokerages with more strict requirements. Being removed from these brokerages limits access to investors because the stock will not be available to them regardless of interest. Delisted stocks will typically trade on the over-the-counter bulletin board (OTCBB) exchange. The stocks on this exchange usually indicate more risk. A stock can redeem its status as the company recovers and meets the requirements to be listed on a more revered exchange market.
Not A Good Sign
As noted above and in the video, this method of artificially inflating share prices to avoid delisting brings no value to shareholders. It doesn’t affect market capitalization or improve the company in any way so you’ll want to be cautious if any of your holdings are heading in this direction. Know the difference between a missed quarter and a dying company. You’ll save yourself a fortune in the long run!