Company likes to keep the financial strength stable. We know that the market situation is always changing. What is reverse stock split? Therefore, to control this, company takes some actions. So as not to adversely affect the company, the company will usually take steps that can affect the capital market. And a reverse stock split is an example of this.
Controlling the stock price:
Reverse stock split is an action taken by a company to control stock prices. The company will combine its shares and issue small number of shares that are considered more valuable than before.
However, most investors already know that the reverse stock splits are a signal that the company is having financial problems. Even so, reverse stock splits can be said to rarely occur on the market because they often cause controversy.
Reduce the price of stock:
Before entering into a reverse stock split, you should also be familiar with the pros and cons of stock split. Stock spill or split stock is an attempt by the company to reduce the price of shares. The decline in stock prices is done by dividing the shares into several parts so that the number of shares becomes more. In practice, between changes in the number of shares and the price of shares will follow a predetermined comparison
Stock splits practice
Compared with reserve stock splits, stock spilts are more often done by companies. One of the main objectives is to increase stock liquidity on the stock market. This increase in liquidity is done to facilitate consumers in the process of selling and buying shares.
Especially for potential investors who have a small retail, because if the stock price is too expensive, they feel they will not be able to buy it. In determining the ratio for stock splits, the company also depends on the approval and convenience of shareholders.
Reverse Stock Spilts practice
Well, reverse stock split itself is actually the opposite of stock split. If a stock split is done by increasing the number of shares, the reverse stock split works by reducing the number of shares circulating in the market to increase the stock price. Although higher stock prices are generally seen as positive, the price increase that originates from a reverse stock split is seen as a sign of problems within the company and is only an accounting trick.
Cancelling all shares from the market
When doing a reverse stock split, a company will cancel all shares circulating in the market. Then, the company will distribute new shares to its shareholders. And the number of new shares that you get is directly proportional to how many shares the company has now, which of course the number of new shares will be smaller. A reverse stock split is usually recommended by company management but must still obtain approval from shareholders through their voting rights.
Circulation of shares depend on price
Just like stock spilts, reverse stock split also follows a predetermined comparison. This comparison is adjusted to the current stock price conditions and desired final prices. So, if the share price is raised, the number of shares will be reduced.
Why Do Companies need Reverse Stock Splits?
1.Recovering Share Prices and Attracting Investors
Instead of a reverse stock split, most investors prefer a stock split. They will get more shares and this idea is felt to be profitable in the future.
However, on the contrary, investors are also less interested in share prices that are too low. Investor perceptions of these shares are not good. They will assume that the stock is not too valuable or in other words cheap. Therefore, a reverse stock split is conducted to increase investor confidence in shares. The company makes a reverse stock split to recover its stock price at an optimal level, so it is hoped that investors will be interested in trading.
The decision in change of price for stocks may affect the number of shares in market so a careful decision is required.