Wednesday, March 18, 2015

Reverse Stock Split.




A reverse stock split is simply a decrease of shares outstanding (shares that can be traded by the public + restricted shares for insiders/executives) by a specific ratio that is made possible by a company reducing its authorized outstanding shares. 10-billion outstanding shares at a price of $20 = 5-billion outstanding shares at a price of $40...aka the market cap is still $200 billion. If one owns 100-shares before a 1:2 reverse stock split one will own 50-shares at the same market value after the reverse stock split.

"In the vast majority of cases, a reverse split is undertaken to fulfill exchange listing requirements. An exchange generally specifies a minimum bid price for a stock to be listed. If the stock falls below this bid price, it risks being delisted. Exchanges temporarily suspend this minimum price requirement during uncertain times; for example, the NYSE and Nasdaq suspended the minimum $1 price requirement for stocks listed during the 2008-09 bear market. However, during normal business times, a company whose stock price has declined precipitously over the years may have little choice but to undergo a reverse stock split to maintain its exchange listing. "