From time to time you may notice on the market that the company, which one day was for e.g. 25 cents, on the next day is 6.5$. Or one day from 120$ the company is suddenly worth 20$. In each of these cases, the news that appeared on the company may be responsible for it. However, there is also another possibility – stock split or reverse split.
Today I will tell, what is split/reverse split of shares, and why are they carried out on shares quoted on US Stock Markets.
What is stock split?
The easiest way to put it is a split of shares while keeping the existing share capital of the company. One day you have 1 share with a value of 100 $. The company decides to split shares in the ratio of 10 to 1. This means that for every share you receive 10.
Why Split of Shares is carried out?
Often the reason is that the company is quite expensive. That’s why smaller number of investors or traders is interested in them. The turnover falls on it, and spreads are greater. The company, which wants to interest in the rate larger number of traders, carries out its division. However, different may be its variations. The assumption is simple. Imagine the stock price on a level of 350$ per share with spread (difference between the purchase and sale price) on a level of e.g. 65 cents. Now imagine the company is 35$ per share with spread on a level of 3 cents. Which is more attractive for you to trade? The answer is simple:)
Low share price is always more attractive for small traders. Therefore, very often after the split of shares, the rate grows because attracts greater number of small traders, who think that the rate will go back as it was before the split. You should remember that after the split of shares, even though the company’s capitalization is steady – the shares grow.
The rate after split of shares
Here, unfortunately, but I won’t present nothing interesting from the recent time. Simply no splits! I will update this section when something interesting appears.
What is Reverse Split of Shares?
Reverse split is to decrease the number of shares on the given company, while keeping the existing share capital. One day you have 10 shares of total value 100$ (10$ per share). The company decides to reverse split of shares in the ratio of 10 to 1. This means that from 10 shares, you’ll have 1 share with a value of 100$.
Why Reverse Split of Shares is carried out?
The most common reason for reverse split is fear of the company before throwing from the listing on the given stock exchange. For example, on NASDAQ if the company remains below the price of 1$ for a long period – then is transferred to OTC market. On the example of IDXG Company, on which on 29 December it reached to reverse split in a ratio of 1 to 10. The company’s rate was below the price of 1$ and/or the market value of company dropped below 1$ million. Therefore, the company received a call to remedy the situation within 90 days, otherwise it will be removed from the stock exchange.
As can be seen the company’s rate on the previous day was closed at 0.72$. If you held 100 shares of the given company, their value in a moment of closing the stock market was 72$. The next day, you woke up holding 10 company shares at 7.2$ (i.e. their total value still was 72$). However, you aren’t sure whether the route on that day will open at this price or lower.
The rate after reverse split of shares
In case of mentioned above IDXG, the reverse split was only carried out to save the company before throwing from listing on NASDAQ. It is nothing special? Rather a poor think. Hence the market didn’t receive this message well. On the day of reverse split, the rate dropped to a level of 5.5$. Somebody holding shares a day earlier with a value of 72$, on that day lost 23.6% on them. Is it much; the reaction on such “news” could not be special.
Another example of the last days: ETRM Company – after reverse split reached to the movement at a level close to 1500% in few sessions.
Where to search for information about coming splits/reverse splits of share
This information is official, and therefore are not a secret:) Data on splits and reverse splits, as well as their size you will find among others on:
Using the news platform Benzinga PRO – free for 14 days
Often, such information provides the broker in which you have an account