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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

Which of the following is a correct description of a stock split?

A stock split lowers the face value of each share and increases the number of shares proportionately, leaving total paid-up share capital unchanged. It differs from a bonus issue, which capitalises reserves, and from consolidation, which merges shares and raises face value.

  1. AIt reduces the face value of each share and increases the number of shares, with no change in the company's total share capitalCorrect
  2. BIt transfers reserves to share capital by issuing free shares, increasing total share capital
  3. CIt reduces the number of shares by combining them, raising the face value
  4. DIt raises fresh funds from existing shareholders at a discount

Explanation

In a split, face value is reduced (for example Rs 10 to Rs 2) and shares increase proportionately, so total share capital is unchanged. Bonus issue capitalises reserves and raises share capital. Combining shares is a consolidation. Raising funds from existing holders is a rights issue.

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