Guest Post: Reverse Stock Splits, by Chris Pascale

Hello, everyone. In today’s guest post, Chris Pascale is going to share his thoughts on reverse stock splits.

Reverse Split? Sell, Sell, Sell – By: Christopher Pascale

A reverse split is when a company reduces the number of shares it has on the market as a means of raising its share price. For example, if you own 100 shares of ABC Corp. at $2 per share, and the company enacts a 1:25 split, then your 100 shares are now 4 shares, and the price goes from $2 to $50.

The opposite of this is a split, which is commonly done at a ratio of 2:1, meaning that in the example above, your 100 shares would turn into 200 shares, but the price would be half as much.

Why Do Companies Split and Reverse Split?

A split is generally a very good thing. Share prices have gone up so much, and the company wants the price to keep going up, but worries that normal investors can’t buy shares if they are too much. So they cut the price in half at no cost to current shareholders.

Many times, the price goes up even more, and it’s possible another split is in the near future. For example, Microsoft shares have split repeatedly since the 1980s, which is why a share of the stock is only over $100, and not several thousand. By keeping the share price affordable, someone with only hundreds to invest at a time can still buy these dividend-yielding shares.

The reason a company does a reverse split is that its share price is too low, which puts it at risk of being taken off the stock exchange. But another way companies can stay in the good graces of the stock exchange is by making a profit! By increasing sales and being profitable, a stock will be valuable. No value is added with a reverse split.

Because the company is playing games instead of making money, it seems the logical thing to do in the case of a reverse split, at least in the short-term, is sell, sell, sell.

For some additional resources check out the following links:

Investopedia 

Zack’s 

Eric’s Book 

Christopher Pascale is an author, accountant and adjunct professor from Long Island. He is the former CFO of Portfolios with Purpose, and is a current member of the IRS’ Office of Appeals.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)

 

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There Is Nothing To Fear.

I’m not a history buff for the most part, but times like these remind me of the famous quote by FDR: “The only thing we have to fear is fear itself.”

As I was thinking about what to post this week, I heard the news that Iran launched a military attack on a US base in Iran.

The futures market for all three indices sold off significantly immediately following these developments.

Could this continue to escalate further?

Of course it could.

However…there is one thing I want you to know.

We don’t care.

Now of course I’m not talking about our troops. We absolutely care about their safety! What I’m referring to is the market volatility that this type of geopolitical event may cause.

One the one hand, it’s unfortunate that an event like this is taking place. On the other, it will help new – and possibly not so new – investors, by strengthening our ability to sound out the noise.

I have no idea what will transpire over the next 30 days.

I do know that the next 30 months will probably be higher than where we are today – in fact, significantly higher.

I must warn you in advance that the media will take news of market volatility related to this conflict and sensationalize it to the highest degree.

Don’t get me wrong, because these events are very serious. I just don’t want you to let headlines scare you into selling.

Over the last 100 years, we have seen multiple world wars and other geopolitical events. Guess what happened to the stock markets.

They fell and came back every time.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)