Interesting post here at MoneyWeek.com about Caledonia Mining Corporation (OTCBB: CALVF, CA:CAL, AIM:CMCL).
The Penny Sleuth author starts the article by explaining that Caledonia Mining Corporation is going to "consolidate its shares" in which he is referring to the 10 to 1 reverse split that Caledonia Mining is planning on undertaking.
Then the author goes on to state "You would think that the type of investor that Caledonia is attempting
to attract with this manoeuvre would have the brains to understand the
irrelevance of the nominal share price, which tells you nothing about a
company’s stock-market valuation."
The purpose of the reverse split is clearly NOT UNDERSTOOD by the genius writing this scathing article about Caledonia Mining. So let me lay it out for him.
By performing the reverse split, the new share price of Caledonia Mining will be over $1.00 per share at current market prices. This opens the doors to a whole new class of investors as Caledonia Mining will no longer be considered a "penny stock".
Penny stocks are known to be highly risky and therefore have many restrictions placed on them for investors wanting to trade them. Penny stocks are highly illiquid when compared to similar companies that are not penny stocks.
There is a huge amount of negative sentiment surrounding penny stocks and this literally steers most investors away from them as they are seen as simply being too risky.
If Caledonia's common shares were trading above a dollar, many more investors may be willing to consider Caledonia Mining Corporation as an investment option.
This article went on to talk about the risks of investing in a company like Caledonia that has its main operating mine in unstable Zimbabwe.