Is a Reverse Stock Split Good or Bad?
Increased Marketability
Low-priced stocks are generally riskier than higher-priced stocks, so many investors shun them. Many institutions only buy stocks that sell for at least $15 a share. By increasing the stock price through a reverse split, a company makes its stock potentially available to more investors.
Margin
Most stocks below $5 a share are not marginable. When the price is increased above $5 a share, many investors and traders may start buying the stock because it is marginable or increase their current positions by buying more on margin.
Listing Compliance
If a stock price drops too low, the company may be in violation of listing compliance, meaning that if its stock price does not increase above a certain threshold by a specified deadline, the stock may be delisted from a stock exchange. Delisting is often a death blow to the shareholders, who won't be able to buy or sell the stock. A reverse stock split may save a company from delisting.
Access to Financing
A company in financial trouble may be in need of a capital injection to survive, but potential investors will want assurances of a reasonable return on their investment. A low stock price is a disincentive for them to invest. A reverse stock split may make it possible for a company to attract investors and raise capital.
Sign of Turnaround
A low stock price, particularly in a well-established company, is often a sign of financial trouble. A reverse stock split by itself will not save the company, but it is often an indication that the management is taking steps to reverse the slide and turn things around.
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Charles Kaplan, president of the investment consulting firm Equity Analytics, told Bankrate.com, "It is usually a very negative sign when a company reverse splits their stocks." But how the market reacts often depends on what else the company is doing to reverse its fortunes. If it simply declares the reverse split and goes on with business as usual, investors may see the split as nothing more than a smoke screen, and the price may go right back to falling as they sell their shares. But if the split is accompanied by serious changes in management, structure or strategy, investors may give the company more time to right the ship.
