Stocks about to undergo reverse stock splits?

Question

I am playing a stock market game for my economics class with $100,000 in pretend money. I really want to win and I am wondering about a new strategy I have come across. Is it a good idea to buy stocks about to undergo reverse stock splits? For example, I am thinking of buying JAVA because it is about to have a 1 for 4 reverse stock split. I read that that will make it go from $5 to about $20. If only the stock price increase is accounted for and not the share decrease (e.g. My shares will stay the same while the price increases), doesn't that seem like a logical thing to do? If so, do you know of any other stocks about to have reverse stock splits? Thanks!

My teacher would not make me decrease my amount of shares though. Like if I buy 10,000 shares at $5 then it goes up to $20 wouldn't I make $100k? My teacher only looks at the stock price and not the fact that there has been a reverse stock split. So he wouldn't make my 10,000 shares reduce to 2,500. I hope that makes sense. We're not playing like the real world.

Answer 1

Are you saying the game you're participating in is flawed and won't account for the decreased shares quantity when the price goes up? If so, sweet! (Too bad we can't make money like that in real life.)

Here's a link to find reverse stock splits in Yahoo Finance:

http://search.news.yahoo.com/search/news?p=reverse+stock+split&adv=1&n=10

Answer 2

Many institutional investors and mutual funds, for example, have rules against purchasing a stock whose price is below some minimum, perhaps $5. An extreme case would be when a share price has dropped so low that it is in danger of being delisted from its stock exchange. It is also possible that a reverse stock split could be used as a tactic to reduce the number of shareholders. In a hypothetical 1-for-100 reverse split any investor holding less than 100 shares would simply receive a cash payment and no shares of stock. If the resulting number of shareholders has then dropped below some threshold, it may be placed into a different regulatory category.

Answer 3

In a reverse stock split, the stock price will increase and the number of shares will decrease. Your shares will be canceled and new shares will be issued. For every 400 shares you owned, you will receive 100 shares.

It is just the opposite with an ordinary split. The number of shares increases and the price decreases accordingly. In both cases, there is no change in the company's assets or liabilities, so there is no monetary change in total capital. Only the structure of capital changes, but the company is the same as before.

Answer 4

It would, except that's not how it works. The share count goes down 4-fold, in other words, you used to have 4 shares worth $5 each, $20 total, now you have 1 share worth $20.

To win, pick a volatile risky stock which may move on some news event during your game. You will either win or lose badly, but you can't win playing conservative in such a game.

Look at the banks (C) and mortgage banks (CFC) and homebuilders (KBH) and investment banks (MER). They are ping ponging up and down right now.

Answer 5

I doubt that your professor is that stupid. When I have my students do these games, I look at the returns on investment -- and the reverse split doesn't help you here.

These games are usually won by people who take on stupid risks and get lucky.