Question

What is the primary purpose of a stock split?

1) To increase the number of outstanding shares
2) To decrease the number of outstanding shares
3) To increase the price per share
4) To decrease the price per share

Answer 1

The primary purpose of a stock split is to decrease the price per share by increasing the number of outstanding shares, making the stock more accessible to investors and increasing market liquidity.

Step-by-step explanation:

The primary purpose of a stock split is to decrease the price per share. This is achieved by increasing the number of outstanding shares. Companies typically do this to make shares more affordable for individual investors and to increase the liquidity of the shares. A stock split, in essence, divides the company's existing shares into multiple units without changing the total market capitalization or the intrinsic value of the company.

For example, in a 2-for-1 stock split, if an investor holds a stock priced at $100 per share, after the split they will hold two shares each priced at $50. The firm's overall value doesn't change, but the lower share price might attract more investors and thus facilitate trading. Although the firm doesn't obtain money directly from a stock split, the increased visibility and liquidity can be beneficial in the long term.