Why Would a Company Perform a Reverse Stock Split?

When a company splits its stock, the value of existing investors’ holdings remains the same. Investors should commonly avoid companies that have undergone a reverse stock split, unless the company provides solid plans to improve its performance. Since stock splits don’t add market value, much of it comes down to making the stock more attainable to everyday investors, and the behavioral benefits best fixed asset management software in 2021 of that. If you’re already a shareholder in a company when it declares a stock split, not much changes. Nevertheless, it’s important to grasp how stock splits work, especially for understanding how the market may react post-split. For example, in a reverse one-for-five split, 10 million outstanding shares at $0.50 cents each would now become 2 million shares outstanding at $2.50 per share.

  • For example, if shares of a company planning a spinoff are trading at lower levels, it may be difficult for it to price its spinoff company shares at a higher price.
  • Stock splitting shouldn’t be the main reason you buy shares of a stock, but it might be a reason to look into investing in one.
  • Though the split reduced the number of its shares outstanding from 29 billion to 2.9 billion shares, the market capitalization of the company stayed the same (at approximately $131 billion).
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  • To fight this perception and improve liquidity, companies will consider increasing their shares outstanding by issuing additional shares to shareholders, which proportionately lowers the share price.

Stock splits allow a company to increase the liquidity of its shares—or how often the shares are traded on a stock exchange. This is also referred to as volume, which is the total number of shares traded within a particular time frame. Publicly traded companies periodically choose to split their stocks when share prices climb too high. As a practical matter, stock splits really don’t matter all that much.

Are stock splits good?

Last, there are implications for intentionally reducing the company’s share price. Public exchanges such as the NASDAQ require stock to trade at or above $1. Should a share price drop below $1 for thirty consecutive days, the company will be issued a compliance warning and will have 180 days to regain compliance. Should the company’s stock price still not meet minimum pricing requirements, the company risks being delisted. Some companies have survived and thrived after going through a rough patch that led to a reverse stock split.

Stock splits present similar situations for people in the investment industry. Finally, the stock split that many investors want to see is Nvidia (NVDA -0.20%). That’s because Nvidia was the stock to own in 2023, having generated a massive 239% return. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

Lower Share Price Not Always a Good Thing

Companies typically do reverse stock splits to attract new investors. They tend to occur because companies believe their stock price is too low. Dividing the number of shares that stockholders own will proportionately raise the market price.

More About Stock Splits

Apple’s outstanding shares increased from 861 million to 6 billion shares. However, the market capitalization of the company remained largely unchanged at $556 billion. The day after the stock split, the price had increased to a high of $95.05 to reflect the increased demand from the lower stock price. Of course, some companies will perform reverse stock splits, cutting the size of their float (the total number of outstanding shares) by a half, two thirds, or more to increase their share price. In May 2011, Citigroup reverse split its shares one-for-10 in an effort to reduce its share volatility and discourage speculator trading. The reverse split increased its share price from $4.52 to $45.12 post-split.

What a Stock Split Is and How It Works, With an Example

Such orders instruct the broker to sell a stock if the price goes above or below a given level. Often, people use a stop order to protect against significant losses, especially in cases where they can’t, or don’t intend to, monitor the stock price regularly. For most trading activity, the effect of a stock split is pretty straightforward.

How to Buy Cannabis Stocks Step-by-Step

When a stock split is declared, the total dollar value of the shares outstanding does not increase. When the stock split is effective, the stock price will fall to keep the market value of the company the same. If before a 3-1 stock split the stock value is $60, after the split it will trade for $20. They both serve to reduce the market price per share and increase the number of shares issued and outstanding. Meanwhile, the company’s board usually conducts a reverse stock split to comply with the minimum bid price requirements.

Part 3: Confidence Going Into Retirement

A stock split is a corporate action by a company’s board of directors that increases the number of outstanding shares. It’s accomplished by dividing each share into multiple shares, diminishing its stock price. The split increases the number of shares outstanding, but the company’s overall value does not change.

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