Groupon reversing?

Q

I read that Groupon is considering a “reverse split.” Is that good? — T.D., Fairbanks, Alaska

A

Nope. Reverse splits are typically executed by struggling companies. Groupon fits that bill, with its stock recently trading around $0.83 per share, down from $26.11, where it closed on its first trading day in 2011.

In its last reported quarter, Groupon’s revenue sank by 23%, more than was expected, and revenue has been shrinking for several years in a row now.

Stocks with shares trading for less than about $5 apiece are penny stocks, often volatile and risky, so Groupon’s price doesn’t look too good these days.

A reverse split is a way to artificially inflate a stock’s price. If Groupon reverse-split 1-for-100, for example, a shareholder with 300 shares would suddenly have 3 shares — and if the stock price had been $1 before the reverse split, it would be proportionately higher post-split, at $100 per share. Notice that the value of the shareholder’s stock doesn’t change: 300 times $1 is $300, and 3 times $100 is also $300. It’s just the stock price that has changed, looking “better” at $100 than it did at $1.

Q

Can you explain the “efficient market hypothesis”? — C.G., Johnson City, Tennessee

A

The efficient market hypothesis, sometimes referred to as the efficient market theory, suggests that all (or most) available information is factored into the price of stocks. Therefore, various stocks can’t be over- or undervalued, and investors can’t outperform the overall market consistently due to their smarts and skills.

Critics of the hypothesis see the stock market as somewhat inefficient (with many investors acting on emotions, not data), and point to some very successful market-beating investors as proof.