A corporate action takes place when a company’s board of directors decides to initiate a process that directly affects the securities issued by that company. The good news is the value of your position before the split has not changed, simply the amount of shares you owned have been adjusted and the price of the stock was also adjusted.
Corporate actions can range from urgent financial matters – including bankruptcy or liquidation, to a firm changing its name or trading symbol. Dividends, stock splits, reverse stock splits, mergers, acquisitions and spinoffs are all common examples of corporate actions.
Types of Corporate Actions:
An increase in the number of shares of a corporation’s stock without a change in the shareholders’ equity. Companies often split shares of their stock to make them more affordable to investors. Unlike issuing new shares, a stock split does not dilute the ownership interests of existing shareholders. For example, if you own 100 shares of a company that trades at $100 per share and the company declares a two-for-one stock split, you will own 200 shares at $50 per share immediately after the split. If the company pays a dividend, your dividends paid per share also will fall proportionately.
Reverse Stock Split
When a company completes a reverse stock split, each outstanding share of the company is converted into a fraction of a share. For example, if a company declares a one for ten reverse stock split, every ten shares that you own will be converted into a single share. If you owned 10,000 shares of the company before the reverse stock split, you will own a total of 1,000 shares after the reverse stock split.
A company may declare a reverse stock split in an effort to increase the trading price of its shares – for example, when it believes the trading price is too low to attract investors to purchase shares, or in an attempt to regain compliance with minimum bid price requirements of an exchange on which its shares trade. In some reverse stock splits, small shareholders are “”cashed out”” (receiving a proportionate amount of cash in lieu of partial shares) so that they no longer own the company’s shares. Investors may lose money as a result of fluctuations in trading prices following reverse stock splits.
Although the SEC has authority over a broad range of corporate activity, state corporate law and a company’s articles of incorporation and by-laws generally govern the company’s ability to declare a reverse stock split.
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