What happened
Shares of Castor Maritime (CTRM -0.92%) plunged 14.2% on Monday after the shipping company said it would conduct a 1-for-10 reverse stock split.
So what
The split will take effect on May 28. After that date, shareholders will own one share for every 10 shares they currently own. This will reduce the company's share count to roughly 90 million, down from 899.6 million today.
Castor Maritime's stock price fell sharply on Monday. Image source: Getty Images.
The move is designed to meet Nasdaq's minimum $1-per-share listing requirement. Castor Maritime's investors approved the reverse split in November.
Now what
Reverse splits are typically met with derision from shareholders, while traditional stock splits are often met with cheers. People tend to prefer owning more shares, rather than fewer. However, neither of these two types of transactions changes the percentage of the underlying business that shareholders own.
A 1-for-10 split is, in many ways, like exchanging 10 dimes for a $1 bill: The underlying value is still the same. Thus, Castor Maritime's shares are likely to trade for about 10 times their current price once the reverse split is enacted. So, for example, an investor who owns 10 shares today that are currently priced at $0.36 each can expect to own 1 share priced at approximately $3.60 on May 28, all else being equal.
So why did Castor Maritime's share price decline as much as it did today? Well, some shareholders may have taken the news as a tacit admission by management that the stock was unlikely to trade above $1 per share anytime soon, if a reverse split was not completed. Many investors, in turn, decided to sell their shares and move on to other, more promising opportunities.
