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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

Which of the following best describes the effect of a stock split, for example a face value change from ₹10 to ₹2 per share, on a shareholder?

A split from ₹10 to ₹2 face value multiplies the number of shares by five, while the price per share falls proportionately. Market capitalisation and the value of the investor's holding remain broadly unchanged, because no new value is created by a split.

  1. ANumber of shares rises fivefold and the market capitalisation of the company stays unchanged at the time of the splitCorrect
  2. BNumber of shares rises fivefold and the shareholder's total holding value rises fivefold
  3. CNumber of shares stays the same and the face value of each share falls
  4. DNumber of shares falls to one-fifth and the price per share rises fivefold

Explanation

Splitting face value from ₹10 to ₹2 creates 5 shares for every 1. The share price adjusts down roughly in proportion, so the total value of the holding and market capitalisation do not change by themselves. A split does not create wealth.

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