CISI Professional Practice Exam 2025 – Complete Prep Guide

Stock splits impact shareholders by increasing the number of shares they own while simultaneously lowering the share price. This means that after a split, shareholders have more shares but each share is worth less individually. For example, in a 2-for-1 split, a shareholder with 100 shares priced at $50 each would end up with 200 shares priced at $25 each, maintaining the overall value of their investment at $5,000.

The reason this occurs is primarily to enhance liquidity and make shares more accessible to a wider range of investors, which can stimulate trading activity. By reducing the price per share, a split can potentially attract more investors who may be discouraged by higher prices, thus increasing demand for the stock. It’s important to note that the intrinsic value of the company does not change due to a stock split; what changes is the distribution of shares among investors, with the total value of their holdings remaining the same immediately following the split.

This also means that options regarding dividends and market valuation remain unaffected directly after a split. Hence, the increase in the number of shares combined with the corresponding decrease in share price accurately reflects how stock splits impact shareholders.