Stock split

A stock split occurs when a company divides its existing shares into a larger number of shares (a forward split) or consolidates them into fewer shares (a reverse split). The split changes the share count and the price per share in opposite directions by the same ratio, so the company's market capitalization — and each shareholder's total investment value — stays the same.

Consider a 4-for-1 forward split: an investor holding 100 shares at $200 per share ends up with 400 shares at $50 per share. Both before and after, the position is worth $20,000. In a 1-for-4 reverse split, the same investor's 100 shares at $2 would become 25 shares at $8. Forward splits typically require shareholder approval because they increase the number of authorized shares in use.

Companies execute forward splits mainly to bring a high stock price down to a range that feels more accessible to retail investors and keeps options contracts affordable. Reverse splits usually aim to lift a depressed share price — often to satisfy an exchange's minimum listing price. Neither action changes the underlying business, though the market sometimes reads splits as a signal of management's confidence (or distress).

Splits also ripple into derivatives: listed options are adjusted so holders are kept whole, with even splits changing the number of contracts and the strike price proportionally. The Series 7, Series 65, and Series 66 exams all test stock splits — expect to calculate post-split shares and prices, confirm that total value is unchanged, and adjust an options position after a split.