General Securities Representative (Series 7) Practice Exam

Which of the following best describes an "even stock split"?

1. A corporate action that increases the total amount of stock

2. A reduction of shareholder equity

3. A policy that decreases the number of shareholders

4. None of the above

The correct answer is: A corporate action that increases the total amount of stock

An even stock split is characterized as a corporate action that increases the total amount of stock available to shareholders while maintaining the overall value of their investment. This occurs when a company divides its existing shares into multiple new shares. For instance, in a 2-for-1 stock split, each shareholder receives one additional share for every share they own, effectively doubling the number of shares while halving the price per share. The market capitalization of the company remains the same immediately after the split, meaning total equity doesn't diminish—each shareholder ends up holding a greater number of shares, but the total value of their holdings stays constant in terms of market value. The other options do not accurately capture the characteristics of an even stock split. A reduction of shareholder equity is incorrect because a stock split does not affect the overall market capitalization or the equity position of shareholders; they simply own more shares at a lower price per share. As for decreasing the number of shareholders or having no applicable description, those definitions do not align with how stock splits function, as splits generally do not change the number of shareholders.