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Coeur Mining, Inc. Message Board

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  • forty2gallonbarrel forty2gallonbarrel Apr 2, 2009 11:03 PM Flag

    Businesweek - Beware the Reverse Split


    A reverse stock split has nothing to do with the value of a company or the value of your position in that company. You are confused because you are combining different issues. It doesn't matter if a company has a single share of stock or 1 billion shares. The company is worth what the company is worth, which is effectively the market's opinion of future cash flows discounted at a rate that adjusts for risk associated with the certainty of the cash flow. All a reverse stock split does is change the number of shares you own. It doesn't change your % ownership of the company, which is what's important. Dilution is another matter all together and has nothing to do with a stock spit or a reverse stock split. Dilution is a result of new shares being issues, which reduces your % ownership of the company. Dilution is the opposite of a company buying back shares, thus increaseing your ownership position in the company.

    Another way to think about this is to draw an analogy to a pie. The pie is the same no matter how many pieces it's cut into. A company is no different. It's worth the same no matter how many pieces/shares it's cut into. The number of shares you own is irrelevant in and of itself. What is relevant is your % ownership. If new shares are issued (a dilution occurs), your total position is worth less because you own a smaller percentage of the company. However, if shares are simply split or reverse split, your total position is worth the same because your ownership percentage is unchanged.

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