Excerpt from NBS article dealing with R/S. A reverse split pushes stocks higher. Now, just to be clear, a reverse split does not in any way add one penny of value to a company. Instead, it is the process of lowering the total number of shares outstanding. Since the market capitalization remains the same, and there are fewer shares, the price of the stock goes higher. Hence, if you own 100 shares of a company prior to a 1:10 reverse split, you'd have 10 shares following the split.
Another fact to consider is that NeoStem was not forced to reverse its stock. We often see reverse splits so that companies can avoid delisting due to not meeting the pricing requirements of the exchange. However, NeoStem trades on the NYSE, which does not have a share price requirement, unlike the NASDAQ. Therefore, the purpose of this split is apparently to raise the stock price so that NeoStem will be more attractive to new investors, including institutional investors.
Why Does The Split Add Value?
You might wonder "why is a reverse split good for a stock?" Unfortunately, there is no fundamental reason, but is rather psychological. I think Amy Baldwin said it best: "It is a perception changer."
For example, NeoStem is a $110 million company, but traded at just $0.57 a share. As a result, there are a lot of retail investors, and hedge funds, that won't even look at the stock regardless of its data or its potential. Think about it, how many investors do you personally know that go searching for stocks under $1? Probably, not too many.
A couple weeks ago the Russell rebalanced its index funds, and with a market cap between $110 and $120 million, it is very possible that NeoStem could have been included. If so, it would have added millions to the company's market cap as all the funds that track Russell indexes would be forced to add NeoStem (or ACTC) by default. Indirectly, such an inclusion can create a great deal of upside for a small-cap stock.