Stock split price effect

Stock split price effect

By: Alex 65 rus Date: 30.06.2017

Reverse stock splits boost a company's share price. A higher share price is usually good, but the increase that comes from a reverse split is mostly an accounting trick. The company isn't any more valuable than it was before the reverse split. Whatever value it has is just distributed over fewer shares of stock, thus increasing the price.

So a reverse split can generally be taken as a bad sign for a company. In a reverse split, a company cancels all of its outstanding stock and distributes new shares to its stockholders. The number of new shares you get is in direct proportion to how many you owned before, but the number itself will be smaller.

In a 1-for-2 reverse split, for example, you would come out of the split owning one share for every two you owned previously. If you owned 1, shares, for example, then you would wind up with shares.

In a 1-for-3 split, you end up with one share for every three you owned, so you would emerge from the reverse split with shares if you started with 1, The company's market capitalization -- the total value of all its shares -- stays the same before and after the reverse split.

It then executes a 1-for-4 reverse split, reducing the number of shares to 2. The total value of your investment remains the same: Nothing about the company has changed except the number of shares available, and that by itself has increased the stock price fourfold.

Companies pull off reverse splits to keep their stock prices out of the cellar.

In part, it's aesthetics and public relations: A stock price in the pennies-to-a-few-dollars range just looks bad. But there are also practical reasons: Charles Kaplan, president of the investment consulting firm Equity Analytics, told Bankrate.

If it simply declares the reverse split and goes on with business as usual, investors may see the split as nothing more than a smoke screen, and the price may go right back to falling as they sell their shares. But if the split is accompanied by serious changes in management, structure or strategy, investors may give the company more time to right the ship.

Cam Merritt is a writer and editor specializing in business, personal finance and home design.

How a Stock Split Affects a Shareholder's Equity | Finance - Zacks

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2 for 1 Stock Split: What Does It Mean? -- The Motley Fool

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More Articles How to Handle a Reverse Stock Split The Advantages of Selling Stocks Before They Split How a Reverse Stock Split Works How to Figure the Average Cost Basis After a Reverse Stock Split Why a Stock Split May Not Be of Great Value to Existing Shareholders How to Find Stocks That Are Going to Split.

The Mechanics In a reverse split, a company cancels all of its outstanding stock and distributes new shares to its stockholders. Share Prices The company's market capitalization -- the total value of all its shares -- stays the same before and after the reverse split. Rationale Companies pull off reverse splits to keep their stock prices out of the cellar.

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Reactions Charles Kaplan, president of the investment consulting firm Equity Analytics, told Bankrate. References 3 USA Today: Reverse Stock Splits - No Limit, but Not a Good Sign Bankrate.

A Primer on Stock Splits USA Today: What Does Citigroup's Reverse Split Mean for Investors? About the Author Cam Merritt is a writer and editor specializing in business, personal finance and home design.

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What Is a 1: Do Split Stocks Count Against Authorized Shares? Money Sense E-newsletter Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

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stock split price effect

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