Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsEasy
A company with 10 million shares outstanding declares a 2-for-1 stock split. If an investor previously owned 500 shares at $100 per share, what will be their new position after the split?
- A500 shares at $50 per share.
- B250 shares at $200 per share.
- C1,000 shares at $50 per share.
- D1,000 shares at $100 per share.
Show answer & explanationAnswer & explanation
Correct answer: C. 1,000 shares at $50 per share.
In a 2-for-1 stock split, the number of shares an investor owns doubles, and the price per share is halved. So, 500 shares become 1,000 shares, and $100 per share becomes $50 per share. The total value of the investment remains the same (500 * $100 = $50,000; 1,000 * $50 = $50,000).
Why the other options are wrong
- A. This incorrectly halves the number of shares.
- B. This describes a 1-for-2 reverse split, and the price calculation is incorrect for that too.
- D. This doubles the shares but keeps the price the same, which would double the investment value.
Stock Split
An increase in the number of outstanding shares of a company's stock, with a corresponding decrease in the share price, maintaining the total market value of the shares.
- Common splits are 2-for-1, 3-for-1, etc.
- Increases liquidity and makes shares more accessible.
- Total value of an investor's holding remains unchanged.
Memory trick: Split means more pieces, same pie. Shares Up, Price Down.