What happened

Shares of Sequential Brands Group (NASDAQ:SQBG) were soaring 43% higher in morning trading Tuesday on no specific news for the company that owns the Jessica Simpson label.

So what

Sequential Brands did a 1-for-40 reverse stock split that became effective at the start of trading yesterday. The stock closed down 23% for the day, and even with today's spike higher, it remains down more than 60% year to date for 2020 and 70% lower for the past 12 months.

Jessica Simpson wearing dress and boots

Image source: Sequential Brands.

Now what

Maybe it's investor confusion over the change in price, since the stock had been trading for around $0.17 per share prior to the reverse split. Reverse splits merge the total shares outstanding into a smaller number, which effectively raises the price of each remaining share. The value of the stock doesn't change, only what each individual share is worth and the number you own. 

Novice investors may not realize the number of shares they're holding may have been dramatically reduced. They could even be sitting on losses rather than the vast profits they're imagining.

Reverse splits are typically implemented by distressed companies whose stock has fallen precipitously low and risk losing their stock exchange listing.

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