What is a stock split?

What is a stock split?

• A. An increase in the market price of a stock
• B. A reduction in the number of outstanding shares
• C. An action taken by a company to divide its existing shares into multiple shares to boost liquidity
• D. A transaction to issue new shares to raise capital

Answer: (C)

A stock split occurs when a company divides its existing shares into multiple new shares, which effectively increases the number of shares outstanding while reducing the individual share price proportionately. The primary purpose of a stock split is to enhance liquidity, making shares more affordable to a broader range of investors without altering the overall market capitalization of the company. When a company conducts a stock split, the overall value of the company remains the same; however, the price per share drops, allowing more investors to participate and trade the stock more easily. This can attract more retail investors and enhance the stock's marketability. Understanding the mechanics of a stock split is essential for investors, as it indicates how a company's management views its stock's current price and its strategy for maintaining effective trading conditions in the market.

A stock split occurs when a company divides its existing shares into multiple new shares, which effectively increases the number of shares outstanding while reducing the individual share price proportionately. The primary purpose of a stock split is to enhance liquidity, making shares more affordable to a broader range of investors without altering the overall market capitalization of the company.

When a company conducts a stock split, the overall value of the company remains the same; however, the price per share drops, allowing more investors to participate and trade the stock more easily. This can attract more retail investors and enhance the stock's marketability.

Understanding the mechanics of a stock split is essential for investors, as it indicates how a company's management views its stock's current price and its strategy for maintaining effective trading conditions in the market.