Reverse division: good or bad?

When it comes to the question of whether reverse splits are good or bad for a company’s share price, it’s not that hard to say that it will end in a bad outcome. When he finds out that a reverse split is taking place in a company he owns, he usually panics and thinks of all the money he is going to lose and gets angry at the company. But before you decide to jump ship and sell your shares in a certain company that has a division, at least understand and assess whether you need to sell your position.

What is an inverse division?

A reverse split is a company that reduces the number of shares to increase its share price. When a split occurs, the market capitalization remains the same. It does not change because the market value of the total number of shares remains the same. All that changed was the number of shares and the price of those shares. An example of this would be company XYZ trading at 50 cents a share with 20,000 shares outstanding. The company does a 1-2 split and trades at $1 per share with 10,000 shares outstanding. That market cap is still $10,000, regardless of whether or not the company is broken up.

Reasons for a reverse split?

Companies will want to do a reverse split for many reasons. But the most common reasons are:

OTCBB shares may rise on the NASDAQ stock exchange depending on the size of the split

NASDAQ-listed companies could break up to remain on the exchange and avoid delisting for failing to meet the minimum price requirement.

You need to be very careful staying in a company through a reverse split because, more often than not, the share price will start to fall after the split. Companies will use these divisions as a last resort to prevent your company from being delisted, so you should evaluate the company very carefully when deciding whether to keep your shares in the company. The only situation where I can see a good result from a reverse split would be an OTCBB stock rally on the NASDAQ. But, in general, spin-offs are bad news for the company and also for you if you are a shareholder of that company.