Reverse division: good or bad?

When it comes to the question of whether reverse splits are good or bad for a company’s stock price, it’s not that hard to say that it will end in a bad outcome. When he finds out there’s a reverse split going on in a company he owns, he usually panics and thinks of all the money he’s going to lose and gets mad 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 a reverse division?

A reverse split is a company that reduces the number of shares in order to increase its share price. When a split occurs, the market capitalization stays 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 per share with 20,000 shares outstanding. The company does a 1-2 split and is trading at $1 per share with 10,000 shares outstanding. That market capitalization is still $10,000, regardless of whether or not the company splits.

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 go up on the NASDAQ stock exchange depending on the size of the split

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

You should be very careful when staying in a company through a reverse split because, most of the time, the stock price will start to fall after the split. Companies will use these splits as a last resort to prevent their 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 to the NASDAQ. But generally, spin-offs are bad news for the company and bad news for you if you’re a shareholder in that company.