While a company uses reverse stock split to reduce and combine their stock shares, mostly, this kind of stock split is executed to boost the share prices and seduce new investors. However, the company's reverse stock split can signify its financial struggling phase. But the question arises: is a Reverse Stock Split Good or Bad for investors and companies?

As everything has positive and negative consequences—the same is the case with a reverse stock split. We will take you through the pros and cons of reverse stock split to get better insights before you jump toward a reverse stock split in real. Let's roll in.

What is a reverse stock split?

A reverse stock split is a company process to merge the number of shares into fewer shares with high-priced value. For instance, if your company chooses to kick off the reverse stock split, then you can convert each 20-stock share into a signal share worth 20 times more than before. A 1-for-20 reverse stock split gives one share for every 20 shares they own. A reverse stock split can increase a stock's price in the short run.

The reverse stock split, also termed as

• Stock consolidation
• Stock merge
• Share rollback.

Is reverse stock split good or bad?

While a reverse stock split could be good for you or even bad—it depends on the situation of the company. The first impression that most of the time you get when you see a reverse stock split in the company is that they are desperate to boost the share price and tempt new investors.

However, this kind of stock split is also a symbol of a company being subpar and struggling financially. Regardless of the reverse stock split reason, it discloses new opportunities or may dump investors' money. If your company wants to decrease its debt or add to wages, then a reverse stock split can reward you in the near term.

On the other side, as long as the prices don't stay adhered then a reverse stock split can cause a loss to investors. This could be due to the failing efforts of the company to get better at its economic status. Like any other thing, reverse stock split has benefits as well as drawbacks. So, let's dig into the pros and cons of reverse stock splits for companies.

Pros of the reverse stock split

• Boost market price of stock: A reverse stock split elevates the stock market price, making it more fascinating and worthwhile for buyers.
• Appeals to institutional investors: While the reverse stock split converts the multiple socks into one with the same value, therefore, it brings the attention of institutional investors. As they mostly pass over the low-priced stocks, in this way, the high-priced stocks are on their good-to-go list.
• Minimize total share: The reverse stock split action reduces the number of shares and, as a result, boosts the demand for fewer shares.
• Improves corporate image: With the reverse stock split process, the company's image in the market also improves because a greater stock price gives the impression of being a stable company.

Cons of the reverse stock split

• May Reduce shareholder value: As the number of stockholders' shares reduces—it can hurt small investors with fewer shares and financial risk.
• Minimize liquidity: Sometimes, the stock gets less liquid because of the presence of fewer shareholders. Consequently, dropping market growth and increasing prices for the stock.
• Can cast down potential investors: A reverse stock split can signal instability in the company, which in turn may discourage potential investors.

Is reverse stock split good or bad for investors?

If your company announces a reverse stock split, then you might instantly think it a terrible news, though it's not. A reverse stock split can become valuable for investors, whether it's a current one or a new one. Because it can boost the share price, and who doesn't crave it?Despite that, risk comes along the way to invest in a company that experienced reverse splits not long ago. Because of the fewer shares in the market—the risks like reduced liquidity and increased volatility emerge on the top.

Reverse stock split example.

You will get a smooth understanding by the following reverse stock split example.

Picture this to understand better: You are a new investor and hold 100 shares in an XYZ company at $10 (total worth $1,000). This company has 100,000 shares, and it announces a reverse stock split of 100:1. Now, each 100 shares is converted to 1 share. Then how is your investment in a company affected through the process of reverse stock split? So, the market capitalization of XYZ company is $1,000,000.

And from the 100:1 reverse stock split, now the company has a 1,000-shares split. You know that market capitalization remains unaffected in a reverse stock split. Thus, every share has a value of $1000. In the end, you own 0.1 share in XYZ company with every share with $1000 so your investment remains constant.

Here we go with the real-world successful reverse splits example;

One of the popular companies, Amazon, also executed a reverse stock split back in June 2022. Amazon split their stock 20-for-1 means that every stockholder obtained twenty shares of stocks for each share before. As a result, stock rises to more than 25% in August.

Another company that successfully went through the benefits of a reverse stock split is Netflix. And they turned their current shares into fewer while increasing the stock price to almost 300%. This increased liquidity and dropped volatility to bring benefits to shareholders.

Summing Up

A reverse stock split combines many shares into fewer ones to boost share price at a brief interval. Is reverse stock split being good or bad? It mainly depends on the company's financial status and objectives. Meanwhile, a reverse stock split can set up new exciting opportunities to grow or can result in money loss (in case the stock prices don't stick).