A Reverse Stock Split Is Coming for Marqeta Shares. Should You Jump In Before It Happens?

Here's some news for those who are or might like to be invested in fintech (financial technology) company Marqeta (NASDAQ: MQ): It's planning a reverse stock split. These are often undertaken by struggling companies, so investors should examine the situation carefully.

The company held its last annual meeting on June 10, and among other things, proposed a 1-for-4 reverse stock split.

A regular stock split increases the number of shares shareholders own, while proportionately shrinking the stock price. So before a 2-for-1 split, you might own 100 shares trading at $20 each, for a total value of $2,000. Post-split, you'd own 200 shares trading for around $10 each, for a total value of... $2,000. See? It's a nothingburger.

Reverse splits, though, reduce the number of shares while boosting the stock price. For example, Marqeta was recently trading for roughly $4 per share. If it splits 1-4, someone owning 100 shares will end up with a quarter of that -- 25 shares. If their 100 shares at $4 per share were worth $400 pre-split, they'll be 25 shares at around $16 per share (four times $4), totaling... $400.

Again, not much changed. So why do a reverse split? The company says, "The primary purpose for implementing the Reverse Stock Split is to reduce the number of outstanding shares of our Common Stock."

I think the main result of the split is more likely the main reason for it: a higher stock price that moves Marqeta out of penny-stock territory.

Should you buy into Marqeta before or after the split? Well, ignore the split and base your decision on your views of its growth prospects. Its shares have largely fallen over the past few years, making them more attractively priced than before. But it only recently turned profitable.

This is not a low-risk stock -- so proceed accordingly and maybe hold off until there's no way it would need a reverse split.

Selena Maranjian has positions in Marqeta. The Motley Fool recommends Marqeta. The Motley Fool has a disclosure policy.