Got a message from my good friend in regards to basic trading, and I felt like sharing it (hoping I answered his question correctly..=/).
His question was:
“hey my b for bothering ya…get back to me whenevr u get a chance…but im stumped at why a company would double their shares in the open market, and follow that action by a 60:1 reverse stock split
-_-“
My response to him was:
“To boost the market price without losing too much of the amount of shares available. To my understanding, the company probably didn’t want to lose that many shares available after the reverse stock split – and they’re looking for some wiggle room for price and shares available for a potential major buyer or buyout.”
For those who don’t know what the question was about – apparently, the company doubled their shares available in the market (which sometimes increase volume), and then did a 60:1 reverse stock split – meaning for example, if you had 600 shares of this company at $1 / share – now you have 10 shares of this company at $60/share after the reverse stock split. This boosts the companies market price per share, but reduces the volume of shares.
Most companies do this – if they have had an outstanding amount of shares that haven’t been bought. In my friend’s case – the company probably had a strategy to reduce the outstanding share and boost the market price of its shares – so you may ask why not just do a 30:1 reverse stock split instead of doubling the shares and then doing the 60:1 reverse stock split? Well, I’m predicting that they probably want a specific amount of outstanding shares available at a specific price that the 30:1 stock split wouldn’t be able to achieve it – and my prediction would be is that – they want that specificity if there’s a major transaction about to happen, meaning company is being bought out or a major amount will be bought by another company, and this would give them wiggle room to negotiate a price and amount of shares.
You learn something new everyday! =)
