Citi Reverse Stock Split: Is It Good for the Stock?
This is a comment left by nt on my post on Citi stock purchase:
I heard that citi group is reverse splitting the shares. Is this good for the investors?
Before talking about what a reverse stock split is, here’s a story of one stock I used to own which did a reverse stock split in the past. The stock is Nortel Network (NT). After falling into the same category (price wise) where Citi stocks belong in today, NT did a 10:1 reverse stock split in December 2006, boosting the share price to some $20 a piece. On surface, $20 a share looks much better than $2/share, but that’s the only thing the reverse split did for the stock. Two years later, NT filed for bankruptcy protection.
|Looking for a cheap stock broker to trade stocks, ETFs, or options? Check out|
OK, now what is reverse stock split? According to the SEC, the definition of reverse stock split is:
A reverse stock split reduces the number of shares and increases the share price proportionately. For example, if you own 10,000 shares of a company and it declares a one for ten (1 for 10) reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no affect on the value of what shareholders own.
That’s enough to say what a reverse stock split is. Then why do companies reverse split their stocks? The SEC has a perfect reason for that as well:
Companies often split their stock when they believe the price of their stock is too low to attract investors to buy their stock.
As for Citi, a reverse stock split probably won’t do the stock any good, except making the price look nice. And as it happened to other stocks, reserve split signals trouble at the company (well, we don’t need any more signal to know Citi is in trouble), therefore, it’s time to get out.
That said, I am going to hold on my Citi shares
Update (March 21, 2011): Citi to conduct 1:10 reverse stock split in May and pay dividend.
This article was originally written or modified on . If you enjoyed reading this post, please consider subscribing to my full RSS feed. Or you can also choose to have free daily updates delivered right to your inbox.