Reverse stock splits are puzzling for even experienced traders….
But for a novice, it can be head scratching…
They often get confused about why a stock all of the sudden shoots up in price…
Or if they’re holding shares, they mistakenly think they’ve made a huge profit based on the stock’s percent gain.
But did they really make more money? And is the stock really worth more?
Today I’ll dig into what a reverse split is, why companies do them, and what it means for you!
These could equal trading opportunities in the future…
What Is A Reverse Stock Split?
A reverse stock split reduces the number of shares of a company.
The company combines existing shares into fewer shares depending on the split…
If it’s a one-for-10 reverse split, 10 shares become one share. If it’s a one-for-20 split, shareholders get one share for every 20 they hold. And so on…
Companies can do any split number it wants to get the desired number of outstanding shares.
But why would a company want to reduce the number of shares? Well, reverse stock splits have more to do with increasing the stock’s price…
Companies like to increase the share price to make it more appealing to traders, since not as many people trade penny stocks as mid-priced stocks.
Or they do it to increase the price to comply with Nasdaq or another exchange’s listing requirements.
What A Reverse Stock Split Means For You
If you hold shares of a company through a reverse stock split, the number of shares you own decreases, but the value of your position stays the same.
So if a stock trades for 50 cents and you hold 1,000 shares, your position is worth $500.
If the company does a one-for-20 reverse split, your 1,000 shares become 500 shares. And the price per share changes to $1.00. The value of your position is still $500.
That’s because a reverse stock split doesn’t change the value of the company. Or the company’s market cap.
It only reduces the number of shares and increases the price of each share.
Watch this video to learn more about what reverse splits mean for you.
Should You Look For Reverse Stock Splits?
Since a reverse stock split reduces the number of shares outstanding, it also reduces the float.
Often a reverse split creates a low-float stock. So if news hits the stock after a recent reverse split, it can send the stock into a rip-your-face-off short squeeze.
And yesterday some news from the Breaking News Chat was interesting…
Not one, but two companies completed reverse stock splits.
Palisade Bio, Inc. (NASDAQ: PALI) completed a one-for-50 reverse split. And SenesTech, Inc. (NASDAQ: SNES) completed a one-for-20 reverse stock split.
This makes me wonder if we’ll see these reverse stock split runs start to heat back up.
Like many themes in the market, plays like buying a recent reverse stock split to ride the wave go in and out of favor.
So I never recommend buying in anticipation of a reverse split, or even after it’s complete…
You want to wait for news and some kind of price action to show there’s a potential trade.
Because these companies are the worst of the worst. Here’s your proof…
After completing a reverse stock split, SNES did what sketch penny stock companies do…
It diluted its shares again with a midday offering for roughly 4.5 million more shares. They didn’t even wait a full day after the split to dilute again!
The Breaking News Chat team alerted traders before the stock halted to the downside and dropped another 40 cents per share after reopening.
This is how the penny stock life cycle continues…
Trade safe and have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade