When a business is launched it issues shares to founders. Shares give them the right to vote on decisions & get a part of revenue. The # of shares increases/decreases over time. Let’s see how you can leverage this in your trades
Supply of shares is dynamic, it moves up & down depending if management decides to issue new shares or buy them back. These corporate decisions are called Stock Splits & Reverse Stock Splits. This creates inefficiencies you can benefit from big time 👇
STOCK SPLIT
A company divides shares into multiple shares. They take your share priced at 5$ & give you 10 shares worth 0.5$. Capitalization remains the same. This makes shares more accessible, affordable & tradable. Here are the consequences 👇
→ Increased liquidity: Attracting more investors & traders.
→ Access: It can make the stock more affordable to a wider range of investors.
→ Psychological: When a company is doing well, this will lead to more trades & a more bullish sentiment.
REVERSE STOCK SPLIT
The opposite of a split. A company would take 10 x 0.5$ shares & give you 1 share for 5$. But would a company do that? & what are the consequences?
One of the main reasons is exchange requirements but let’s dig deeper
Those are the reasons:
👉 Meet exchange rules: Listing on exchanges have rules & one of them is to keep your stock price above 1$. If a stock falls below for 30 consecutive days, the exchange will send a warning & initiate delisting.
👉 Enhanced perceived value & aligning with peers.
To look more credible a company may do this to attract more institutional investors. However If the company is not doing well, most of the times, price will decrease slightly after reverse split. You can scalp trade this
→ Reverse dilution: If the company raised a lot & issued a large number of shares, price per share might have gone down. This can lead to reverse dilution on a per share basis & help corporate rebranding attracting more investors than traders.
TRADING
🟣 You can trade splits to the upside as liquidity will increase with a decrease in price, it’s more affordable.
🟣 Reverse splits if done for exchange requirements could lead to a decrease in price post reverse. It also pushes away traders decreasing liquidity
This is a very common corporate action taken by many companies out there. This could also be applied in Web3 & I will do another thread on this soon.
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