| Often times with a penny stock, a reverse split is an | | | | on their charter. A company that authorized |
| attempt to bring up the price of the stock. A | | | | 10,000,000 shares and has 5,000,000 shares |
| reverse split is when a company sets in place a new | | | | outstanding can only issue another 5,000,000 shares |
| amount of shares to replace a set amount of | | | | into the market. But what if the company was |
| existing shares. | | | | presented with an opportunity that would require |
| As an example, a 10 for 1 reverse split would mean | | | | 5,000,000 shares to be issued to capitalize on it? The |
| that the company would issue 1 share for every 10 | | | | company could do a 10 for 1 reverse split so that |
| shares that an investor holds. The logic is that once | | | | there would only be 500,000 shares outstanding after |
| there are only a tenth of the shares outstanding the | | | | the split. The company is still authorized to issue |
| price would increase by 10 times. Ten old.50 shares | | | | 10,000,000 shares. Now that there are only 500,000 |
| would now be converted into one new share worth | | | | shares outstanding it can issue an additional 9,500,000 |
| $5.00. The logic seems to work out but the problem | | | | shares. Before it could only issue another 5 million |
| is that investors might not feel the price of the stock | | | | since it had 5 million shares outstanding. The company |
| can be maintained at that level for long. After all, | | | | at this point probably doesn't care that the price is |
| they remember this stock trading at pennies, not a | | | | substantially lower since it has more shares to issue |
| $5.00 stock. So the majority of times, stocks that | | | | to make up for the loss in price. |
| have gone through reverse splits steadily drop in | | | | In these cases, investors end up losing a majority of |
| price until they trade at near what they traded for | | | | their investment after a reverse split. If you're holding |
| prior to the split. | | | | penny stocks or have a penny stocks to watch list, |
| Companies know that this will happen, but they | | | | be aware of reverse splits as they can dramatically |
| move forward anyhow. The company knows that | | | | affect the value of a stock. |
| they can only issue a certain amount of shares based | | | | |