Stock Investing 101

Reverse stock splits are pretty simple. They are the opposite of stock splits. Reverse stock splits are when a company decides to reduce the number of shares they have out on the market in order to increase the price each share is worth. Reverse stock splits are popular with penny stocks and stocks that have fallen greatly in price.

Here is an example of a reverse stock split: Company XYZ is trading at 1 dollar a share and wants to trade at 10 dollars a share so it can get more recognition and respect amongst investors. It has 100 million shares outstanding and is therefore worth 100 million dollars according to investors. It completes a 1 for 10 split which cuts the number of shares out available on the market from 100 million to 10 million but effectively raises the price per share from 1 dollar to 10 a share.

There is no increase or decrease in the actual value of a company in a stock split or a reverse stock split, these splits are just done in order to keep the price of a share of a company reasonable. Investors get weary when they see a company is trading at 30 cents a share or 3,500 dollars a share.

You should never buy or sell a company because of a split, it is important to understand what a reverse stock split is but is equally important to realize that they are meaningless as far as the impact they have on the investment is concerned.