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No. of Recommendations: 13
"...Statisticians note that 75% of all the companies whose stocks trade for less than $5 per share (whether on or off the major exchanges) go bankrupt over any ten-year period."

You're confusing the stock price with the company's financial state. In an ideal world, there should be good correlation between the two. As we have recently been reminded in the tech sector, though, the markets are not run by ideal forces. A company goes bankrupt because it runs out of money, not because its stock price is depressed.

Suppose on Monday Microsoft decides to do a surprise 30:1 split. No shareholders will have lost anything; they will each have 30 times as many shares at 1/30th the price. Nothing fundamental about the company would have changed; revenues and sales wouldn't be any different. Would this post-split Microsoft be any closer to bankruptcy than the pre-split Microsoft?

What the Fools' warning alludes to is the fact that a company heading towards bankruptcy will necessarily have its stock price drop below the magic $5 mark. Note the cause-and-effect here: bankruptcy leads to low prices, but low prices do not lead to bankruptcy.

I'm reminded of the following dreadful example on the abuse of statistics: apparently, at one point, Arizona had an incidence rate of tuberculosis over three times greater than the nationwide average. Did this mean that, if you moved to Arizona, you were three times as likely to catch tuberculosis? No, it turns out the dry, hot climate of Arizona was ideal for tuberculosis sufferers, and that many had moved to Arizona because of this.

Statistics are wonderful tools, but if you subject them to naive interpretation, they will inevitably lead to incorrect conclusions.
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