Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
A customer holds 100 shares of ABC stock at $60 per share. The company declares a 2-for-1 stock split. Immediately after the split, what will be the customer's position?
- A50 shares at $120 per share.
- B200 shares at $30 per share.
- C200 shares at $60 per share.
- D100 shares at $30 per share.
Show answer & explanationAnswer & explanation
Correct answer: B. 200 shares at $30 per share.
In a 2-for-1 stock split, the number of shares doubles, and the price per share is halved. So, 100 shares become 200 shares, and $60 per share becomes $30 per share. The total value of the investment remains the same (100 * $60 = $6000; 200 * $30 = $6000).
Why the other options are wrong
- A. This describes a reverse 2-for-1 split, where shares are halved and price doubles.
- C. The number of shares doubles, but the price per share also halves, not remains the same.
- D. The number of shares doubles in a 2-for-1 split, not remains the same.
Stock Split
An action by a company that increases the number of its outstanding shares by dividing each existing share into multiple shares. The total value of the investment remains unchanged; the price per share decreases proportionally.
- Increases number of shares, decreases price per share.
- Total market value of holding remains the same.
- Often done to make shares more attractive to investors.
Memory trick: Splits 'split' the price, but 'multiply' the shares.