NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks
Which of the following best describes a stock split?
A stock split reduces the face value of each share and increases the number of shares in proportion, so total share capital stays the same. Unlike a bonus issue, no reserves are capitalised, and the market price per share falls roughly in proportion to the split.
- ACompany issues shares to existing holders from reserves, increasing share capital
- BCompany reduces face value of each share and proportionately increases the number of shares, with no change in total share capitalCorrect
- CCompany buys back shares from shareholders
- DCompany offers new shares to existing holders at a discount
Explanation
A split divides each share into more shares of lower face value, so total paid-up capital is unchanged. Option A describes a bonus issue, C a buyback and D a rights issue.
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