Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

A stock split occurs when a company divides its existing shares into multiple new shares to increase the number of shares outstanding while effectively maintaining the overall market capitalization. The primary objective behind a stock split is often to make the shares more affordable for investors, which can enhance liquidity.

When a company executes a stock split, the price per share decreases in proportion to the split ratio. For example, in a 2-for-1 split, the price of each share is halved, but the number of shares that each stockholder owns doubles. This is where the decrease in price comes into play. Although the number of shares owned increases, the total value of the investment remains constant in the short term, as shareholders still maintain the same overall stake in the company.

In this context, the decrease in price per share due to a stock split is the most significant effect that is observed, reflecting the intent to increase access for a broader range of investors while maintaining ownership percentages.