Reverse stock split
Quantitative division of your stock (shares) by the decision of a company. In simple words, a company decides to reduce the number of your shares, in order to increase the price of each share and create a bigger demand for the stock, and artificially boost up the portfolio of the company.
Do I lose money in reverse stock split?
As a rule, you lose some of it, but not all. If you had 100 shares in a company with 5$ per share (500$ in assets), then in a 1-for-15 reverse stock split with an adjusted price rate of 50$ per share (instead of 5$) you will lose some of it. Divide 100/15 = 6.6, your stocks are reduced now to 6-7 shares now, multiply it by the new price rate of 50$ per share and you'll get 350$ dollars of assets (7x50=350). Your portfolio suffered 150$ because of the undergoing procedures.
Sometimes, stock's par value can be adjusted higher in the reverse stock split, however companies usually make adjustments favorable for themselves and not for the investor. Usually, the common stock owners lose around 20% of their portfolio as a result of the reverse split.
Pros
- company shares increase in price
- shares become more lucrative
- company creates a higher portfolio for future investors
- company evades de-listing from NASDAQ and other platforms
- company evades possible bankruptcy
Cons
- current shareholders may lose some value of their portfolio
- adjustment rates may not be fair
- company may use it against the investor, in order to short-sell own stocks
- an indication of a 'shallow' company, trying to 'pump up' the demand artificially
- the stock price may fall further due to such news
- does not guaranty success for the company
Examples:
In may 2023, Aspira Women's Health Inc. announced 1-for-15 reverse stock split decision for all current shareholders in common stock. During the past 4 years the price was falling from 10$ per share onto 90 cents per share and it was notified by SEC and Nasdaq of being potentially de-listed (shares cheaper that 1$ get de-listed from Nasdaq in 3-4 months if the problem is not fixed). The company decides to undergo the reverse stock split procedure and now ASWH is worth around 3.4$ per share.