What Is a Reverse Stock Split?
Due to market developments, companies take different practices into action based on different situations. One way to remain in the market is a reverse stock split. It is a type of action that reduces the number of shares by merging them. As a result, the value of shares will rise, while the value of the company will remain unchanged. The main reason why companies opt for reverse stock splits is to cause per-share price bumping. This course of action is proposed by company management and is subject to consent from the shareholders through their voting rights. The main advantages of reverse stock splitting can be as follows:
- Preventing major exchange removal
- Attracting big investors
- Satisfying regulators
- Boosting spinoff prices
However, a reverse stock split is not recognized positively by market participants. It shows that the stock price has gone to the bottom and that the company management is attempting to inflate the prices artificially without any real business proposition. Additionally, the liquidity may also take a toll with the number of shares getting reduced in the open market.