General Securities Representative (Series 7) Practice Exam

In a reverse even stock split, which factor decreases?

1. Selling price per share

2. Number of contracts

3. Shares owned

4. Premium

The correct answer is: Number of contracts

In a reverse stock split, a company consolidates its outstanding shares, meaning that shareholders will own fewer shares after the split, but the overall value of their holdings remains the same. In this case, the factor that decreases is indeed the number of shares owned. For example, in a 1-for-10 reverse split, if a shareholder had 1,000 shares of stock before the split, they would have 100 shares following the split. Although the number of shares has decreased, the price per share will typically increase proportionally to maintain the overall market capitalization of the company. This means that while the daily trading activity may remain unchanged, the total ownership represented by shares is reduced. In terms of contracts, a reverse stock split can affect options contracts, as they may need to be adjusted to reflect the reduced number of shares available. However, since the question focuses on what specifically decreases, the shares owned is the clear factor here.