Symmetrically, the reverse process is called reverse split, the stock has a higher price after the reverse Split has taken place. The simple reason why a company would want to reverse split is because it wants its share price to be worth more not less.
Why does a company do a reverse stock split?
When the price of a company falls below $5, for example, many investment funds are unable to buy it due to self-limitation, they have policies that avoid staying with companies whose prices fell to those levels because they become part of the so called penny stocks, those are very risky and volatile companies and infamous in the market. That is why companies apply the reverse split, in order to continue being chosen by institutional investors and give an illusion of a higher price in the case of complicated companies that have suffered a process of deterioration in their fundamentals and that have left them with a very low price.
In addition, in some cases, it is done to meet the price requirements of some exchanges such as the Nasdaq that require that the share price cannot be placed on average below $1 in 30 calendar days.
What does a reverse stock split mean for an investor?
But what real effect does it have for the shareholder? The transaction is neutral from a purely financial point of view.
An investor, who has 99 shares that trade at $0.70 once the reverse split has been carried out, would have 33 shares at a price of $2.1. That investment would continue to be $69.3.
From the psychological point of view, experts recognize that there are some changes. “Companies that trade below one dollar convey the image of companies with problems. With a reverse split that stigma is removed and if the company does good in the future, there may be a positive effect on the price.