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Kamis, 23 Oktober 2008

Can you profit from a delisted stock?

This is just a short note about how you can profit from the delistings.


It happens because a stock's share price has remained under $1.00.

Usually when a company is dropped from Nasdaq it goes straight to the OTCBB, where it may or may not remain indefinitely. However, many companies refuse to accept the delisting and instead opt to shore-up their share price by doing a reverse split.





A reverse split results in fewer outstanding shares - for example in the case of the company with 50 million shares outstanding, it might execute a 1 for 10 reverse split. Now the company has only 5 million shares outstanding - in other words, if you were a shareholder and were sitting
on 1,000 shares, you would only have 100 shares post-reverse-split.

Of course, the market capitalization of the company would (in theory) remain the same (i.e. the total size of the pie would not change).


Therefore the share price should presumably increase substantially, post-reverse-split.

The unfortunate truth is that the share price increase is usually only temporary. Pretty soon the stock drifts lower again, as technical and fundamental pressures take their effect.

Therefore it is usually an excellent opportunity to short the stock once
the reverse-split has been executed.

The great thing about this technique is that you are shorting Nasdaq stocks and usually most brokerages can facilitate this.

But shorting stocks has major risk, since your downside is unlimited, so please remember that.

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