Friday, January 17, 2014 4:07:14 PM
Benefits
According to MSN, there are a number of benefits to reverse stock splits besides preventing a delisting. For example, some fund managers and brokerages consider a stock that costs less than $5 -- known as "penny stocks" -- to be too speculative and are reluctant to purchase them. A 500 to 1 stock split can turn a penny stock into a stock that a manager might consider buying. Also, investors can't purchase stocks under $5 on margin.
Expert Insight
Although reverse stock splits are merely a tactic of raising a stock's price, the need for a company to do so may signal that it is in poor financial health. According to Michael Brush, a columnist with MSN, a reverse stock split is a "red light warning" that a company is in financial trouble. Brush says that as many as three-fourths of companies end up trading lower after a reverse split.
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