Stock Splits
A change in the number of outstanding shares with a matching price adjustment so total market value is unchanged: forward splits (e.g., 2-for-1) lower the price; reverse splits raise it.
The exam loves the reverse-split math because students freeze on it: a 1-for-10 reverse split of 1,000 shares at $2 leaves 100 shares at $20 — divide shares, multiply price, position value unchanged. The “tell” is that a reverse split is cosmetic, not value-creating — it fixes nothing fundamental and often signals distress, done to regain the $1 minimum bid price for listing. A second favorite asks about resting GTC orders: a forward split adjusts open limit orders (price reduced, size increased), while a reverse split cancels them. Note that DNR (“do not reduce”) shields orders only from cash-dividend price cuts, not from split adjustments.
Don’t confuse a split with a stock dividend — both are non-taxable and lower cost basis per share, but a dividend capitalizes retained earnings into paid-in capital, while a split restates par value. And don’t conflate either with a buyback (treasury stock), which actually shrinks outstanding shares and lifts EPS; a split changes neither. Memory hook: a split just slices the same pizza into more pieces.
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