It's simple market psychology and math...
Let's suppose IHSI conducts a 1 to 1000 R/S. A common split ratio w/multi-billion share stocks.
Assume I am holding 10 million shares of IHSI valued at $1,000. After the R/S, all shareholder share counts will be adjusted by 1/1000th. On the effective date, I check my trading account, and I am now holding 10,000 shares at a value of $1,000.
IHSI stock price is adjusted by 1/1000: TZ1 (.0001) to 10 cents.
IHSI share count is reduced by 1/1000: 13,064,192,525 to 13,064,193.
30 minutes before trading begins, everything looks great doesn't it? Or does it?
I'm still holding $1,000 of IHSI stock. The share price has now jumped from .0001 to 10 cents. This is wonderful. This is great. This is what everyone wanted, a higher stock price. But keep in mind, traders are still holding the same value ($1,000) but fewer shares of stock.
But therein lies the market: The two major sides of every trade (both longs and shorts) and a third (a scalper in the middle). Retail investors are prevented from buying (or selling) OTC below or above fractions of TZ1, for instance, neither you nor I, can sell IHSI @ .00015 for a 50% gain on our holdings, but market makers (and hedge funds) can, and that's how they make their money. This rule of thumb limits the number of investors, who like to participate on the short-side of the trade to primarily the pros. But we have a new scenario.
IHSI is now trading at 10 cents.
IHSI is NOW on the radar of many new traders with news out days or weeks before IHSI is R/S.
Short-sellers look for signs of weakness in companies. Those weaknesses spike fear and doubt in the company, its management and the ability of the stock price to climb after a R/S. Signs of weakness could be no (or limited) operations, high debt, dark (not pink current), flailing management who've tried different business models with none of them working. There are other signs of weakness, but let these serve for this exercise.
So in-between the 30 minutes of checking my trading account and the market's open, I go back and read management's recent press release on all the great things the reverse split will accomplish. They are pumped. I'm pumped. I believe in the magic fairy dust management has sprinkled on the stock price.
1 minute before market open, I'm excited to watch the day's trading of IHSI finally climb out of this hole management has put itself in.
The market opens, then after a slow climb to .1015...1038...1042, IHSI suddenly reverses course, .0983....091...0826...0773...0658. IHSI is dropping like a stone and so is my trading account. I am mystified. In shock. Saddened. Can't believe my eyes. Wondering what in the h#ll is going on? I get mad...red in the face...p*ss'd...sweating. Cursing profusely at my computer screen as IHSI drops all the way down to .0483 cents. Below 50% of my $1,000 IHSI value.
So what happened?
Weeks before, days before, the morning of, during the trade, 100's of traders saw an opportunity to make money in IHSI on the downside. Who lost? You and I and all other shareholders who hung on after the wonderful company announcement. Days and the weeks go by, and the share price continues to go down, as management, now with an opportunity to flood the market with new shares, the stock price continues to drop and so does our trading account, significantly. Welcome to the OTC.
