Question 1

Step 1: Calculate the new share count.

Accepted Answer

You take your original 150 shares and multiply by the split ratio.
$$S_{new} = 150 	imes \left(\frac{4}{1}ight) = 600 	ext{ shares}$$
You will own 600 shares of AlphaTech after the split is executed.

Question 2

Step 2: Calculate the new share price.

Accepted Answer

You take the pre-split price of $400.00 and multiply by the inverse of the split ratio ($\frac{1}{4}$).
$$P_{new} = $400.00 	imes \left(\frac{1}{4}ight) = $100.00 	ext{ per share}$$
The new market price when the market opens on the ex-split date will be $100.00.

Question 3

Step 3: Verify the total investment value.

Accepted Answer

To ensure the math is correct, multiply your new share count by your new share price.
$$600 	ext{ shares} 	imes $100.00 = $60,000$$
Your total investment value remains exactly $60,000. The underlying value of your portfolio has not changed by a single penny, but you now hold four times as many shares at one-quarter of the price.

Question 4

Do stock splits affect my taxes?

Accepted Answer

No, the execution of a standard stock split is not a taxable event under IRS rules. Because your total investment value and proportional ownership of the company have not changed, you have not realized any capital gains or losses. The only exception is if your split results in fractional shares and the company issues "cash-in-lieu" for that fraction. The cash received is treated as a sale of that fractional share, and you must report any resulting capital gain or loss on your tax return for that specific, usually minor, cash amount.

Question 5

What happens to my dividend payments after a stock split?

Accepted Answer

Your total dividend income remains exactly the same, but the dividend per share is adjusted proportionally. If a company pays a $2.00 dividend and executes a 2-for-1 split, the new dividend will be $1.00 per share. Because you now own twice as many shares, your total payout ($1.00 x 2) equals the original payout ($2.00 x 1). The dividend yield as a percentage of the stock price is completely unaffected by the corporate action.

Question 6

Why would a company ever choose to do a reverse stock split?

Accepted Answer

The primary reason is survival and exchange compliance. Major stock exchanges like the NYSE and Nasdaq require stocks to trade above $1.00 per share. If a distressed company's stock falls to $0.20, it faces delisting, which would destroy its liquidity and cut off access to institutional capital. By executing a 1-for-10 reverse split, the company artificially boosts the price to $2.00, satisfying the exchange requirements and maintaining its status as a publicly traded entity on a major board.

Question 7

How do stock splits impact short sellers?

Accepted Answer

Stock splits mathematically adjust short positions in the exact same way they adjust long positions, resulting in no net change in financial exposure. If you are short 100 shares of a $200 stock (owing $20,000 worth of equity), and a 2-for-1 split occurs, your account will be adjusted so you are now short 200 shares of a $100 stock. You still owe exactly $20,000 worth of equity. The split itself does not force a short squeeze, though the psychological retail buying leading up to a split sometimes can.

Question 8

What is the difference between a 2-for-1 and a 3-for-2 split?

Accepted Answer

The difference lies purely in the mathematical ratio of the division. In a 2-for-1 split, your share count is multiplied by 2, and the share price is divided by 2 (a 50% price reduction). In a 3-for-2 split, you receive three shares for every two you own, which means your share count is multiplied by 1.5, and the share price is divided by 1.5 (a 33.3% price reduction). Companies use 3-for-2 splits when they want a milder reduction in their share price.

Question 9

Do stock splits change the company's market capitalization?

Accepted Answer

Absolutely not. Market capitalization is calculated by multiplying the total number of outstanding shares by the current price per share. Because a stock split increases the share count and decreases the share price by the exact same proportional multiplier, the two changes perfectly cancel each other out. If a company has a $50 billion market capitalization on the day before the split, it will have a $50 billion market capitalization the second the market opens on the ex-split date.

Question 10

How do I calculate my new cost basis after a stock split?

Accepted Answer

To find your new cost basis per share, you simply divide your original purchase price by the split multiplier. If you originally bought 50 shares of a stock for $300 each (total cost basis $15,000), and the stock undergoes a 3-for-1 split, you divide your $300 original purchase price by 3. Your new cost basis for tax purposes is $100 per share across your new total of 150 shares. The total aggregate cost basis remains $15,000.

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