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Question: What is a Reverse Stock Split?
Answer: Many companies attempt to list their securities on one of the major stock exchanges, like the NYSE, in order to provide greater liquidity to shareholders. In order to earn and maintain exchange listing, however, the corporation must meet several criteria, including a minimum number of round lot holders (shareholders owning more than 100 shares), total shareholders, net income, public shares outstanding, and price per share.
In times of market or economic turmoil, individual businesses or entire sectors may suffer a catastrophic decline in the per share stock price. The aftermath of the Internet bubble is the perfect example; many stocks fell by 90 percent or more. If the market price falls far enough, the company risks being delisted from the exchange; a terrible tragedy for existing stockholders. At the New York Stock Exchange, for example, this is triggered after an issue trades at below $1 per share for 30 consecutive days.

In order to avoid this fate, the Board of Directors may declare a reverse stock split. The move has no real economic consequences. Here’s an illustration: Assume you own 1,000 shares of Bubble Gum Industries, Inc., each trading at $15 per share. The business hits an unprecedented rough patch; it loses key customers, suffers a labor dispute with workers, and experiences an increase in raw commodity costs, eroding profits. The result is a dramatic shrinkage in the stock price – all the way down to $0.80 per share.

Short-term prospects don’t look good. Management knows it has to do something to avoid delisting, so it asks the Board of Directors to declare a 10 for 1 reverse stock split. The Board agrees and the total number of shares outstanding is reduced by 90 percent. You wake up one day, log into your brokerage account, and now see that instead of owning 1,000 shares at $0.80 each, you now own 100 shares at $8.00 each. Economically, you are in the same position as you were prior to the reverse stock split, but the company has now bought itself time.

If you've spent a lot of time hanging around your broker's office or reading financial publications, you may have heard of a phenomenon known as the summer doldrums.
What exactly are the summer doldrums? Simply put, traders, brokers, money managers, and investment analysts are human. On warm, sunny days, many would rather be heading to the Hamptons to catch up with friends, or laying by the pool sipping a lemonade. If they aren't in the office, that means they aren't as likely to buy and sell stocks (would you be thinking about Home Depot, Berkshire Hathaway, or Coca-Cola while grilling steaks and playing with the kids?).

The reduced volume results in greater volatility because the transactions that are completed are going to have a bigger impression on the price of the stock. If you wanted to sell 1,000 shares of a thinly traded bank stock in North Carolina, the order may not have a huge effect on the equity's price if the company trades an average of 100,000 shares each day. If, however, trading volume falls 30% in the summer to 70,000, your order is going to have a more powerful influence on the price of the stock by pressuring it to fall as you sell your holdings.

In Wall Street lore, the summer doldrums officially end after labor day in September, when hedge fund managers, mutual fund gurus, and stock pickers head back to work and are forced inside as their kids return to school.

Market capitalization is a term used on Wall Street that is extremely important. Although it is often heard on the nightly news and in financial textbooks, very few new investors know what market capitalization is or how it is calculated. It’s actually really easy and intuitive. After you read about the details of market cap, as it is often called for short, you’ll understand the concept and begin using it when putting together your own portfolio.
The Definition of Market Capitalization

Put simply, market capitalization is the amount of money it would cost if you were to buy every single share of stock a company had issued at the current market price. For instance, The Coca-Cola Company has 2,317,441,658 shares of stock outstanding and the stock closed at $49.60 per share. If you wanted to buy every single share of Coca-Cola stock in the world, it would cost you 2,317,441,658 shares x $49.60 = $114,945,106,236.80. That’s just shy of $115 billion. On Wall Street, people would refer to Coca-Cola’s market capitalization as $115 billion.
Why is market capitalization such an important concept? It allows investors to understand the relative size of one company versus another. AutoZone, a retailer of auto parts, trades at $150.31 per share. Yet, the company’s market capitalization is only $8 billion. Despite having a stock price 3x higher than Coke, AutoZone is actually only 6.9% the size of the soft drink giant! This is why I wrote How to Think About Share Price. In that article, you learned that it’s possible for a $300 stock to be cheaper than a $10 stock.

The Shortcomings of Market Capitalization

There are some shortcomings to using market capitalization as a guide to a company’s size. The biggest is that market capitalization does not factor into consideration a company’s debt. In other words, in addition to having $115 billion in stock market value, Coca-Cola has $20 billion in debt. If you were to buy every share of Coke’s stock, you would own the company but still be responsible for the company’s $20 billion in debt. Thus, your “true” purchase price would be $115 billion + $20 billion = $135 billion. This figure is known as enterprise value and I explained everything you need to know about it in the article Enterprise Value – Determining the Takeover Value of a Company. There are actually some other factors that determine the difference between market capitalization and enterprise value so if you’re interested in the details, it would be worth your time to click over to those articles and take a few moments to read them.
Using Market Capitalization to Build a Portfolio

A lot professional investors divide their portfolio by market capitalization size. This approach, they believe, allows them to take advantage of the fact that smaller companies have historically grown faster but larger companies have more stability and pay fatter dividends.
Here is a breakdown of the type of market capitalization categories you are likely to see referenced when you begin investing:

Micro Cap: The term micro cap refers to a company with a market capitalization of less than $300 million.
Small Cap: The term small cap refers to a company with a market capitalization of $300 million to $2 billion.
Mid Cap: The term mid cap refers to a company with a market capitalization of $2 billion to $10 billion.
Large Cap: The term large cap refers to a company with a market capitalization of $10 billion to $50 billion.
Mega Cap: The term mega cap refers to a company with a market capitalization of $50 billion or more.

In the Left Corner: Certificates of Deposit

In the Right Corner: Money Market Funds

The Verdict

Although both can be useful, for those who need access to their capital and / or have much higher cash balances, money markets are often the superior choice.  For those who want to time maturities to certain events or benefit from a willingness to lock away savings for a long period of time, certificates of deposit are often the better portfolio selection.

In You’re Spending Your Millions $1 at a Time, you learned that compound interest has the power to turn seemingly small amounts into large fortunes if given enough time and the right rate of return. This article discusses the so-called Rule of 72. This rule allows the investor to quickly and efficiently answer two questions:

How long will it take me to double my money if I earn X%?
What return must I earn if I wish to double my money in X years?
Using the Rule of 72 When the Rate of Return Is Known

An investor that knows he can earn 12% on his money may ask the question, “How long will it take to double my money at this rate of return?”.

Using our handy Rule of 72, this is a snap to calculate! Simply divide the magic number (72) by the investor’s rate of return (12). The answer (6) is the number of years it would take to double the investment.

Using the Rule of 72 When the Number of Years Is Unknown

The Rule of 72 can also be used in reverse. An investor who wanted to double his money in a certain number of years could use the rule to discover the rate of return he would have to earn to achieve his goal.

Imagine, for a moment, a businessman who wanted to double his money in four years.  To estimate a rough rate of return required to achieve such a feat, he'd divide 72 by 4. The result (18%) is the after-tax compound annual rate of return he would have to earn to meet his goal on time.

Practical Examples of the Rule of 72 in Action

Q: John Q. Investor needs to double his money in seven years to reach his financial goals. What rate of return must he earn to do this successfully?

A: John would take 72 divided by 7.  The answer, 10.2857%, is the amount he will need to earn on an after-tax basis to successfully reach his goal.

Q: Susan Q. Investor is earning a 9% after-tax return on her investments. How long will it take her to double her money?

A: To calculate the number of years necessary to double her money using the Rule of 72, Susan would divide 72 by 9.  The answer, 8, is the number of years it will take for her investment to double after taxes.