Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
A client owns 200 shares of ABC stock at $45 per share. The company announces a 1-for-4 reverse stock split. After the split, what will be the client's new share count and cost basis per share?
- A50 shares at $45 per share
- B800 shares at $11.25 per share
- C800 shares at $180 per share
- D50 shares at $180 per share
Show answer & explanationAnswer & explanation
Correct answer: D. 50 shares at $180 per share
In a reverse stock split, the number of shares decreases, and the price per share increases proportionally, while the total value of the investment remains the same. For a 1-for-4 split, the investor will have 1/4 of their original shares, and the cost basis per share will be 4 times the original cost basis.
Why the other options are wrong
- A. While the share count is correct, the cost basis per share should increase, not stay the same.
- B. This represents a forward stock split (4-for-1) rather than a reverse split.
- C. This incorrect combination reflects both an increased share count and increased price, which is not how a reverse split works.
Reverse Stock Split
A corporate action where a company reduces the total number of its outstanding shares by consolidating them into fewer, proportionally more valuable shares. The total market value of an investor's holding remains the same.
- Decreases the number of shares.
- Increases the price per share.
- Total value of holding remains unchanged.
- Often used to increase stock price to meet listing requirements or improve perception.
Memory trick: Reverse Split: Fewer shares, higher price, same total pie!