What happened
Shares of Office Depot (ODP -1.24%) were volatile on Tuesday, after the company confirmed its reverse stock split will proceed as planned. It appears that at least some investors are confused about what this means, and don't know how to best profit from the situation.
During today's session, Office Depot stock has ranged from 3% down to 12% up, but it was more volatile than this in pre-market trading.
Traders were confused about Office Depot's reverse stock split. Image source: Getty Images.
So what
So what's the best way to trade this news from Office Depot? In reality, there isn't any good way. Stock splits and reverse stock splits do nothing to create or erode shareholder value. It's all relative.
Think about ordering a large pizza. Cutting it into 16 slices doesn't create more pizza than eight slices. The overall size of the pizza doesn't change; it's only distributed differently. In the same way, Office Depot's price per share will go up after its reverse stock split. But shareholder value won't be created. There will simply be fewer slices to the same size pizza.
Clever people might try to profit from Office Depot's stock split by using options. However, this is also futile. Option contracts are "made whole" after a split: They adjust at the same rate as the share price.
So why is Office Depot doing a reverse stock split if it's truly meaningless for shareholders? The stock's price per share is low, and the major stock exchanges have listing requirements. If a stock falls too low, it risks being delisted. Therefore, Office Depot can get its share price back up now before it becomes a problem.
Now what
After the markets close today, Office Depot stock will undergo a 1-for-10 reverse split. As of this writing, the price per share is $2.20. If you hold 10 shares now ($22 in value), you'll own just one tomorrow. But it will be worth about $22 per share -- 10 times as much as today.
It's important to know why you're buying a stock, and Office Depot's volatile trading tells me not everyone understood what was going on. That's unfortunate. But it's never too late to grow in your understanding of what can really drive shareholder value over the long haul. I believe anyone can learn how to invest in stocks and beat the market, if they're willing to put forth the effort.
