Kiana Marie

Sound like a ballet position doesn't it? Actually not unrelated -- it's a way companies sometimes dance around the fact their stock is selling at a low price.

THE DEFINITION EXPLAINED

A reverse split is a method that reduces the number of a company's outstanding shares and that, at the same time, increases the par value of the individual shares. For example, a one-for-three split would result in your owning one share for every three shares you owned before the split. You have fewer shares but each is now worth more. The total value of your shares, however, remains the same. You investment is worth the same dollar amount as it was the day before the split.

Let's say for example, that COMPANY XYZ had 10 million shares with a par value of $5. It then issues a one-for-two reverse split and ends up with 5 million shares outstanding with a par value of $10.  If you owned 100 shares at $50 per share, now, with the reverse split, you will own 50 shares at $100 per share. The total value of your portfolio will still be $5,000.

Just as solid companies often split their stock, making more shares available at a lower price and thus attracting new investors, smaller, riskier companies sometimes do just the reverse and reduce the number of shares to increase the price.

WHY MANAGEMENT GOES FOR A REVERSE SPLIT

Although a reverse split has no effect on a company's overall value, management obviously has a reason for going this route. The most common are:

(1) The strategy is often used by a company to protect itself when its stock price dwindles -- it in effect reduces the number of outstanding shares, making each share more valuable.

(2) A reverse split is sometimes issued to raise the share price sufficiently so the company can remain listed on NASDAQ or one of the exchanges.

In August, for example, Grove Strategic Ventures (NASDAQ:GSVI) announced a one-for-five reverse stock split. This bumped the company's share price above the $1 mark for the first time in more than three months.  The stock, which was trading at 34 cents, traded at $1.71 after the split.

GSVI had come dangerously close to being delisted and in fact, had been warned by NASDAQ that it would be if its stock didn't reach $1.00 by September 18, 2000.

Reverse splits are not confined to NASDAQ listed stocks. In August of 1999, Sunshine Mining & Refining Co. (NYSE: SSC), one of the world's leading silver producers, implemented a one-for-eight stock split. The move was specifically undertaken to increase the stock price to over $1 to comply with the then newly filed NYSE continued listing requirements.

(3) A reverse split is also used when the company thinks that the higher stock price will make it look better.  Looking better attracts more investors, which in turn is likely to push up the price of the stock as more people buy shares.

BOTTOM LINE: A reverse split is generally seen as a negative, although it may very well be only a short-term negative. Management may be taking this step in order to make the stock appear more valued, to cover up the fact the stock is falling in price or to move the stock up and out of being a poorly regarded penny stock. (Many investors shy away from buying these very low priced, so-called penny stocks.)

$TIP: If you own a stock that has declared a reverse split, immediately take a look at the company's fundamentals. Check with your broker and read the analyst's opinion in "Value Line Investment Survey" (http://www.valueline.com/). Most libraries and brokerage firms subscribe to this weekly publication.