SIE Ready📣 Corporate Actions · Lesson 2 of 4 · 5 min
More Slices, Same Pizza: Splits and Stock Dividends
🍕 After a 2-for-1 split you own twice as many shares, each worth half as much. Total value does not change at the moment of the split.
💡 Key idea
Splits and stock dividends change share count and per-share price and basis, not total value or total basis.
🧠 Why it matters
A FORWARD SPLIT increases shares and cuts the price in proportion. 100 shares at $60 after a 2-for-1 split become 200 shares at $30: still $6,000. A REVERSE SPLIT does the opposite: 500 shares at $2 after a 1-for-5 reverse split become 100 shares at $10. A STOCK DIVIDEND pays extra shares instead of cash: a 10% stock dividend on 200 shares adds 20 shares, and the price adjusts down. In each case the investor's total value and TOTAL COST BASIS are unchanged; the PER-SHARE basis is recalculated. Example: basis of $4,000 for 100 shares ($40 each) after a 2-for-1 split is $4,000 for 200 shares ($20 each). Formula for an X-for-Y split: new shares = shares × X ÷ Y; new price = price × Y ÷ X.
📈 In the real world
✂️ Grace, a fictional customer, panics when her statement shows her shares fell from $90 to $30. Her rep explains the company did a 3-for-1 split: her 50 shares became 150, still about $4,500, and her $3,600 total basis is now $24 per share.
📌 Takeaways
- Forward split: more shares, lower price, same total value
- Reverse split: fewer shares, higher price, same total value
- Total cost basis is unchanged; per-share basis adjusts
📖 Terms in this lesson
Stock split: Dividing each share into more shares at a proportionally lower price, leaving total value unchanged.
Reverse split: Combining shares into fewer shares at a proportionally higher price, leaving total value unchanged.
✅ Test yourself
A customer owns 300 shares at $45. After a 3-for-2 split, what is the position?
- 450 shares at $30
- 600 shares at $22.50
- 200 shares at $67.50
- 900 shares at $15
Answer: A · 450 shares at $30
3-for-2 means 3 new shares for every 2: 300 × 3/2 = 450; price $45 × 2/3 = $30. Value stays $13,500. 200 at $67.50 is the reverse arithmetic, and the others use the wrong ratio.
After a 1-for-4 reverse split, 800 shares at $3 become which position?
- 200 shares at $3
- 200 shares at $12
- 3,200 shares at $0.75
- 400 shares at $6
Answer: B · 200 shares at $12
1-for-4 means 1 new share for every 4: 800 ÷ 4 = 200 shares, and $3 × 4 = $12. Value stays $2,400. 3,200 shares is a forward split, and 200 at $3 forgets to adjust the price.
What happens to an investor's total cost basis in a 2-for-1 forward split?
- It halves
- It resets to market
- It stays the same
- It doubles
Answer: C · It stays the same
The investor paid the same total money, so total basis is unchanged; only the per-share basis halves. A split is not a sale, so basis does not reset to market value.
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