8. Watch out for reverse splits!
Here's how a reverse stock split works. A company's stock currently trades at $1. The company implements a one-for-five reverse split. Every five shares of pre-split stock becomes one share. The investor, who had previously held 1,000 shares, now owns 200 shares of the post-split stock. The new stock price immediately after the split is $5. The market value of the position, before and after the split, is $1,000. What could be wrong about that?
Because when such a reverse split takes place, it's often a glaring indication that all is not well at the company. True, the shareholder does not suffer a loss of asset value or dilution of ownership value. But this equality is usually very temporary.
When a company undertakes a standard stock split, things are usually going well. The business operations are profitable and growing, and the shares are moving steadily upward. Such is almost never the case for the company implementing a reverse split.
Pure and simple, reverse splits are facilitated to improve the appearance of the company and its stock price. The company whose stock is $5 appears more valuable than one whose stock is merely $1. But if the company really believed in its future and wanted to reduce its amount of outstanding shares, it would start to buy them from the market.
Furthermore, the stock is now ripe for a secondary offering of more shares by the company. For the pre-split shareholder, his percentage ownership in the company will endure a magnified degree of dilution the moment the new shares hit the market. The company's objective for the share offering has yielded the desired capital, but the risk has been transferred to the shareholders. It makes no monetary difference to the company.
(Exact quote from stockdetective.com
---------------------------------------------------------------------
I can say I'm certain they will raise the authorize shares to 100 million or 100,000,000 shares. No one should expect them to have "only" 2.5M shares. I'm mad as hell -MR |
