In a reverse stock split, the company increased its share price by reducing the number of shares in circulation proportionally. For example, in a 100-to-1 reverse stock split, an investor who owns 10,000 XYZ shares costs 10 cents per share that will end up owning 100 shares worth $10. A reverse stock split is generally considered positive for a number of reasons.
Low-priced stocks are often risked riskier than higher-priced stocks, so many investors shun them. Many organizations only buy stocks that sell for at least $15 a share. By raising the share price through reverse splits, a company makes its shares capable of providing more investors.
Most stocks under $5 a share are worthless. When the price rises above $5 a share, many investors and traders can start buying stocks because it is valuable or increases their current position by buying more margin.
If the share price falls too low, the company may violate listing compliance, that is, if their share price does not rise above a certain threshold before a certain period, then the stock may be delisted on the stock exchange. Delisting is often a fatal blow to shareholders who will not be able to buy or sell shares. A reverse stock split could save a company from delisting.
Access to finance
A financially struggling company may need to be poured capital to survive, but potential investors will want a guarantee of a reasonable return on their investment. Low stock prices are a factor that discourages them from investing. The opposite stock split can make it possible for a company to attract investors and raise capital.
Signs of rotation
Low stock prices, especially in a long-established company, are often a sign of financial problems. The reverse stock split itself won’t save the company, but it’s often a sign that management is taking steps to reverse the slippage and turn the situation around.