Well it looks like investors are not amused with FXCM’s plan to do a 1:10 reverse split of its shares.
FXCM Inc (NYSE:FXCM) shares tanked 12% on Wednesday, following the company’s announcement late Tuesday that investors will receive 1 share for each 10 which they currently hold – something investment bankers call a ‘Reverse Stock Split’, meant to decrease the number of outstanding shares of a company and thereby increase the value per share.
FXCM shares traded during the day as low as $1.11, closing at $1.14 – their lowest closing price ever.
In a 1:10 reverse split, one would expect that the share price would rise by a factor of 10 after implementation.
FXCM’s stated reason for the reverse split was that it wants to remain listed on the NYSE. As we wrote earlier when the split plan was announced, we don’t totally buy the party line here. The NYSE has a minimum $1 share price requirement, and FXCM was still comfortably above that level.
The ‘real’ reason we believe is that many institutional investors shun stocks whose share price is below $5, some by rule. There are also certain short selling limitations on sub-$5 stocks, limiting how some investors trade those stocks.
Also, from a perception-of-the-company standpoint, it is much better to show customers: Hey, we’re an NYSE listed company with a $10+ share price, as opposed to being a ‘penny stock’ $1-range share price company. FXCM certainly uses its stature as a publicly listed company as a marketing tool in attracting new clients, even incorporating the ‘FXCM listed NYSE’ phrase into its Home Page logo.
So why are investors using the reverse split as a lever to dump the shares?
Well truth be told we are not 100% sure, but it does look like that management is signalling that there might be more downside than upside in the share price, leading to the decision to move the share price up by artificial means.