Should I sell when a company reduces its capital? An investor's guide to selling during capital reduction

Facing capital reduction in stocks, many investors find themselves in a dilemma: should they seize the opportunity to sell, or continue holding? This is not a simple yes or no question, but a decision that requires a deep understanding of the reduction mechanism and an assessment of one’s own situation.

First, clarify: What exactly is a capital reduction?

A capital reduction refers to a company’s voluntary decrease of its issued share capital. It sounds complicated, but essentially, the company either repurchases some of its shares from the market or directly cancels unlisted shares, ultimately leading to a decrease in the number of circulating shares.

Why would a company do this? There are various reasons:

• Financial restructuring: When a company is experiencing severe losses, a reduction can help adjust its financial structure and lighten the burden of losses
• Increase per-share value: With fewer total shares, earnings and asset value per share increase accordingly, making the stock appear more attractive
• Reward shareholders: Capital reduction can serve as a form of capital return, allowing investors to share in the company’s success
• Reduce debt pressure: In some cases, reduction can alleviate the company’s debt situation

After the reduction, is the stock still worth something?

This is the question most investors care about. The answer is: It depends on the reason for the reduction and the market reaction.

Positive effects of capital reduction on stock price:

Earnings per share will increase. Suppose a company has an annual profit of 1 million, with 1 million shares outstanding, earnings per share are 0.01 yuan; after reduction, only 500,000 shares remain, and earnings per share become 0.02 yuan. Under the same profit, the stock seems more valuable.

Reducing the number of circulating shares can also push up the stock price. With less supply and demand unchanged, prices tend to rise.

But also beware of negative signals:

If a company is forced to reduce capital due to operational difficulties or massive losses, this may be viewed by the market as a warning sign. The stock price could actually decline.

Calculating stock price is actually not complicated: