Reverse & Forward Stock Splits: Understanding Why Companies Do It
The reverse/forward stock split is a tactic that is utilized by many companies at some point. It has become a controversial practice in the eyes of many individual stockholders. Here are the basics of the reverse/forward stock split and why companies use it.
How it Works
The reverse/forward stock split is when a company performs two different stock splits in different directions, one after the other. For example, a company converts 100 shares of company stock into 1 share of stock. Then immediately after that, they transfer that one share back into 100 shares. During the process, anyone that has less than 100 shares will be cashed out and eliminated as an investor. This leaves only those that have more than 100 shares as investors.
Reasoning
Companies utilize this form of stock split in order to eliminate smaller investors. Certain companies do not like smaller investors, as it creates more work for them overall. They have to communicate with each individual investor, which takes time to do. Many companies implement this procedure in order to save money on administration costs along the way. As an investor, this can be frustrating if you are not considered a large investor. However, when this happens, you can always go out and buy the same shares immediately afterwards.
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