Shifting Into Reverse

Q

What are reverse stock splits? — T.M., Augusta, Georgia

A

Imagine you own 100 shares of a stock trading at $10 per share. With a regular split, such as a 2-for-1, you’d end up with 200 shares of a $5 stock.

Reverse splits go in the other direction. With a 1-for-10 reverse split, for example, you’d end up with 1 share for each 10 that you owned, and the share price will be multiplied by 10, so you’d have 10 shares, priced around $100 each. Note that the total value of your shares doesn’t change — it’s still $1,000. The company simply increased its stock price by decreasing its number of shares.

Reverse splits are often done to avoid getting delisted from a stock exchange that has minimum stock-price requirements. They can also prop up stock prices so they look less embarrassing. Be wary of companies announcing reverse splits, as they’re often in trouble.

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Q

I know it’s best to invest in stocks for the long term, but how long is that? — B.P., Janesville, Wisconsin

A

Aim to hold on to the stocks you buy for at least several, if not many, years. As long as the company remains healthy and is likely to keep growing at a good clip, and as long as its stock price hasn’t gotten way ahead of itself, it’s probably best to hang on. Many fortunes have been built by people who stayed invested in solid stocks for decades.

Remember, too, that long-term capital gains are generally taxed at a lower rate than short-term gains. That’s another benefit of long-term investing. (For capital gains, “long term” means at least a year and a day.)