General Securities Representative (Series 7) Practice Exam – Your All-in-One Guide to Exam Success!

A stock split is indeed a corporate action that increases the number of shares while reducing the price per share. When a company conducts a stock split, it divides its existing shares into multiple new shares. For example, in a 2-for-1 split, shareholders would receive an additional share for each share they own, effectively doubling the number of shares outstanding. This action does not change the overall market capitalization of the company, but it does lower the price per share, making the stock more accessible to a broader range of investors.

The motivation behind a stock split often includes improving the liquidity of the stock and making it more affordable for everyday investors. By reducing the price per share, even more investors can participate in buying the stock, which can help to stimulate trading activity and potentially increase the stock’s marketability.

This understanding is important, as it distinguishes a stock split from other corporate actions, such as consolidating shares during a company acquisition or issuing new shares for debt repayment, both of which serve different purposes and have different implications for shareholders.