Reverse split of shares of a company: quickest way to become millionaire?

Question

Everybody is telling me not to buy stocks(cost 12/share now) in a comppany which is about to do a reverse split of its shares(1:10); I mean if I buy 4000 shares now they will be worth 480,000$ after the split right.

I really don't get it.

Answer 1

Noooooooo   .   .   .

4000  shares  at  $12   each  is  worth  $48,000

A   reverse  1  for  10  will  mean  400  shares ,  now  hopefully  worth  $120   each ( still  $48,000 )

but  that  is  rare .

Usually  the  reverses  are  the  stocks  that  have  fallen  on  hard  times  ( like  Sun  MicroSystems  did )  and

They  have  to  do  a  reverse  to  get  their  trade  price  back  above  a  dollar  ( to  meet  market  trading  requirements ) .

Sun  ( Now  JAVA  I  think )  did  a  reverse  1  for  4  and  got  back  above  a  dollar  then  changed  their  symbol .

http://finance.yahoo.com/q/bc?s=JAVA

During  good  times  ( like  for  Microsoft )  the  normal  splits  are   like  4  for  1   and  prices  are  usually  upward  bound .

http://finance.yahoo.com/q/bc?s=MSFT&t=m...

Notice  the  normal   ( Not  reverse )  splits  before  2000 .  .  .

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Answer 2

A reverse stock split reduces the number of shares and increases the share price proportionately. For example, if you own 10,000 shares of a company and it declares a one for ten reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no affect on the value of what shareholders own. Companies often split their stock when they believe the price of their stock is too low to attract investors to buy their stock. Some reverse stock splits cause small shareholders to be "cashed out" so that they no longer own the company’s shares.

I have only had stocks reverse split when the company is performing poorly. NO...YOU WILL NOT MAKE MONEY AS THERE IS NO EFFECT ON VALUE. Company's do a (normal) split when they are performing VERY well and their stock price is high.

Answer 3

Simply put:

4000 shares @ $12 each = $48,000.

Then reverse split of 1:10. This means 1:10 of both shares and price per share.

400 shares @ $120 each = $48,000.

You get fewer shares at the same total value.

If you can not understand this simple math, you shouldn't be in the stock market.

Answer 4

hypothetical:

you buy 1,000,000 shares in a company @ $1.00 per share, and get a 1% stake in the company.

if that company does a 2:1 reverse split, you still have $1,000,000 worth of stock, and the same 1% stake in the company, but now you only have 500,000 shares worth $2 each.

so the actual share price doesn't matter as far as how much your investment is worth (if you could get rich by changing the value of your stock arbitrarily, then every company would be doing this every single day!).

really, the only reason that a company would do a reverse split is so it doesn't become a penny stock, where people don't trust the actual investability of that company.  would you buy a stock at four and a half cents per share?  probably not.

so the only companies that do reverse splits are ones that aren't doing very well financially, and their stock is in danger of becoming illiquid.

Answer 5

You can go for it....but ur calculation above is absolutely wrong...It will worth $48000....both before and after

Answer 6

Splits never, ever impact the value of what you own.  Otherwise, all companies would buy their own stock, and just do splits all the time and get rich.  It's silly.  Surely you are smart enough to understand the split has no effect.  It is unimportant.

Here's what's important.  The reverse split is something a company does just before the stock goes to zero.  They do it on the way DOWN.  Understand? You know about DOWN?

So - if you buy 4000 shares now, for $12, and then the stock has a reverse split, and then it goes to $zero per share, then it'll be worth zero.