Saw this news item and wondering
a. what are stock splits?
b. how do splits actually help a company? i.e. Does it make them more money?
In: 0
The reason AMC is doing a reverse stock split is to keep their stock price high enough to avoid becoming a “penny stock.” Basically, a penny stock is one that trades under a dollar, and the NYSE will delist (i.e., remove) stocks that trade under a dollar (technically, their daily closing price cannot be below $1 for 30 consecutive days if they wish to trade on the NYSE).
The reason their (already low) stock price is in danger of moving into penny stock territory is because AMC is converting some of it’s preferred equity (basically “higher-level” stock) to common stock, and that conversion will highly dilute existing shares of stock (by up to 90%). This means that a share worth $5 before the equity conversion will be worth about 50 cents afterward. A 10-1 reverse stock split in theory brings the stock price back to $5 per share, but cuts the number of shares by 90%.
Stock splits are pretty simple, the company divides every stock into multiples. If you owned 10 shares, and the stock splits 10/1, you will own 100 shares.
It’s entirely a public perception thing. Companies will split their stock when they think their stock price is too “expensive” or reverse split if they think their stock price is too “cheap”, while not affecting any other aspect of the company’s finances.
a reverse stock split allows a company to dilute the stock holders by returning stock to their treasury and allowing them to sell their stock or issuing it to employees. It’s a way to raise money for the company at the expense of share holders. It also keeps their price at a certain threshold to avoid being delisted
a stock split allows their stock to be more affordable if someone wants to buy but can’t afford the share price. It becomes more attractive as an investment.
A stock split is just adjusting how many pieces the company is split up into. Number of shares are pretty arbitrary, so sometimes a company wants to make more, smaller shares and sometimes they want fewer, larger shares.
Think of a pizza — a large pizza could be cut into 4 pieces, 8 pieces, 12 pieces, etc. So a stock split is like if a pizza with 4 slices had each cut in half to make 8 slices 1/2 the size they were previously. Same amount of pizza overall, just more manageable sizes. A reverse split is like the opposite, making fewer slices.
Companies may split because the stock gets too high in price for investors to buy in quantity. Investors often like to buy 10, 100, 1000 shares but if the stock trades for a few hundred or thousand dollars then it’s hard for many investors to buy the amount they want. Say a stock trades at $600/sh. An investor wants to invest $1,500, but has to decide if they want 2 shares for $1,200 or 3 at $1,800. If the stock splits 10:1, then the investor can buy the 25 shares at $60 to get the investment they want.
On the other hand, too low a share price means a company’s shares cannot be bought by institutional investors (most don’t buy sub-$10 stock), might be at risk of de-listing by the exchange they trade on, and sends a general perception to many investors the company is doing poorly. So a company with a stock trading at $5.35 might decide to do a 1:10 reverse split, cutting shares down to only 10% of their previous count but now each worth $53.50.
In both cases, the overall value of the company doesn’t change directly, they company has no financial gain, but the price perception might have a positive impact on demand for shares and help hold it steady or increase share price.
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