What’s a SPAC?
Q AIs it OK if a company does a reverse stock split? — C.I., Syracuse, New York It’s generally a red flag, as reverse splits are often executed by struggling companies. With a regular stock split, you end
up with more shares, priced pro
portionately lower. But a reverse split does the opposite, propping up the stock price (which can make the company look better) while shrinking the number of
shares.
Imagine Scruffy’s Chicken Shack (Ticker: BUKBUK), trading at $5 per share. If you own
200 shares, they’re worth $1,000.
If the company executes a 1-for
10 reverse split, you’ll end up with 20 shares, priced around
$50 each. The total value of
your shares remains the same —
$1,000 — both before and after the split. All that happened is that the company increased its stock
price by decreasing its number of shares.
Some reverse splits happen so
companies can avoid being de
listed from stock exchanges that require minimum price levels.
If you notice that a troubled company’s stock is suddenly
trading at a much higher price per share, it might mean that
a reverse split has occurred
— not that the company has
pulled off a remarkable turnaround.
***
What’s “algorithmic trading”? — J.S., Gainesville, Florida
It’s when computers — not
humans — are placing buy and sell orders in the market, and
they’re doing so based on certain
algorithms — sets of predetermined rules. The aim is to make
money via fast-paced and frequent
trading. Algorithmic trading can influence stock prices and market volatility, which can also affect us small investors.
Q AWant more information about stocks? Send us an email to foolnews@fool.com.