I'm very familiar with how reverse splits work, both in theory and in reality. I've also held through many of them since the theory is good. The reality is that holding lost me money in the majority of them.
Once they are above $2.50 they are easy to short and since the vast majority of biotechs fail there are a tremendous number of retail shorters flocking to these newly uplisted biotech stocks. That is part of why so many drop after the split.
Then there is the issue of your trading platform. The majority of brokers don't allow you to sell your shares during the first three days after a split. One of my brokers allows me to do so and that is how I made money a few times on reverse splits. I was able to sell on that first day while most others were stuck just watching the price go down as shorters latched on.
Sometimes, the price stays up and keeps going, but, that isn't as common as the drop in price. So, as a rule, I'll get more of a stock I want after the initial drop after the third or fourth day. Even if I'm wrong on a particular stock I'm ok with the decision to wait since the risk is just too great for me to enter with any size pre split.
In the long run, the uplisting, even if coupled with a reverse split is a good thing. Just, not always for pre split holders.
Thanks for the information though. The effort is greatly appreciated since most don't bother taking the time.
In Reply to 'bobbo379'
How an Uplisting Works (from The Street):
"Fact No. 4: Reverse splits are a sign of good things for companies on the way up, but a sign of bad things for companies on the way down.
In order to meet the minimum share price requirements for Nasdaq, many companies will conduct a reverse split. This is perfectly acceptable to the exchange, and the post-split share price will be evaluated accordingly.
Using a reverse split to raise the share price and obtain an uplisting is a very positive sign for a company and is much different than companies that use a reverse split to prevent being delisted. Once again, the confusion relates to delisting as opposed to uplisting. Many people who don't focus on uplistings only encounter reverse splits in the context of companies that are trying to stave off a delisting, so in many people's eyes a reverse split is a sign of a troubled company.
For the relative few of us focused on uplistings, a reverse split is typically the first catalyst that attracts attention to the potential uplisting and is considered a very good event."
How an Uplisting Works - TheStreet
