GE stock trades: How to profit from a reverse stock split

GE stock trades: How to profit from a reverse stock split

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We prepared this article to explain every bit of how to profit from a reverse stock split. Reverse splits should be met with skepticism. When a stock’s price gets so low that the company doesn’t want it to look like a penny stock, they sometimes institute a reverse split. History has shown less than stellar results for companies that do this.

KEY TAKEAWAYS
A reverse stock split consolidates the number of existing shares of stock held by shareholders into fewer, proportionally more valuable, shares.
A reverse stock split does not directly impact a company’s value.
It does, however, often signal a company in distress since it raises the value of otherwise low-priced shares.
Remaining relevant and avoiding being delisted are the most common reasons for corporations to pursue this strategy.

Understanding Reverse Stock Splits
Depending on market developments and situations, companies can take several actions at the corporate level that may impact their capital structure. One of these is a reverse stock split, whereby existing shares of corporate stock are effectively merged to create a smaller number of proportionally more valuable shares. Since companies don’t create any value by decreasing the number of shares, the price per share increases proportionally.

Per-share price bumping is the primary reason why companies opt for reverse stock splits, and the associated ratios may range from 1-for-2 to as high as 1-for-100. Reverse stock splits do not impact a corporation’s value, although they are usually a result of its stock having shed substantial value. The negative connotation associated with such an act is often self-defeating as the stock is subject to renewed selling pressure.