Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesEasy
A customer holds 200 shares of XYZ stock. The company declares a reverse stock split of 1-for-4. Immediately after the split, what will be the customer's new share count and the most likely effect on the price per share?
- A50 shares; price per share decreases.
- B800 shares; price per share increases.
- C800 shares; price per share decreases.
- D50 shares; price per share increases.
Show answer & explanationAnswer & explanation
Correct answer: D. 50 shares; price per share increases.
In a 1-for-4 reverse stock split, the number of shares is divided by 4. So, 200 shares / 4 = 50 shares. To maintain the total value of the investment, the price per share will increase proportionally, approximately by a factor of 4.
Why the other options are wrong
- A. While the share count is correct, the price per share would increase, not decrease.
- B. This would be similar to a forward stock split, not a reverse split.
- C. An increase in shares and decrease in price would be a forward split.
Reverse Stock Split
A corporate action where a company reduces the number of its outstanding shares, which typically increases the market price per share proportionally, maintaining the total market value.
- Reduces number of shares.
- Increases price per share.
- Total market value remains unchanged.
Memory trick: Reverse: Fewer pieces, each worth more. Forward: More pieces, each worth less.