Profits Reversed

My buying 2,000 shares of a company for 65 cents per share in 1996 based on a cocktail party tip was very dumb. Two years later, the company executed a onefor six reverse stock split, leaving me with 333 shares. The stock price was soon 25 cents per share, and it kept dropping. In 2006, it filed for bankruptcy protection. No more "hot tips" for me!

— M.S.Z., Sun City West, Ariz.

The Fool Responds: Technically, a reverse split doesn't affect the value of your holdings. One hundred shares of a $10 stock are worth $1,000, as are 50 shares of a $20 stock, after a one-fortwo split. However, companies don't usually do reverse splits unless they're facing some challenges, so we should see them as red flags. (A reverse split can make a stock price look less embarrassing, among other things.) Companies that have recently executed or announced plans for reverse splits include Citigroup, Borders, Rite Aid and Time Warner. Your main error, as you know now, is buying on the basis of a hot tip — always do your own research and thinking before buying anything.

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