Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What happens to the basis per share after a stock dividend is issued?

1. It is the same as before the dividend

2. It decreases

3. It increases

4. It fluctuates based on market conditions

The correct answer is: It decreases

When a stock dividend is issued, the overall value of the investment remains unchanged, but the number of shares owned by the investor increases. For example, if a company issues a 10% stock dividend, shareholders receive additional shares equal to 10% of their current holdings. As a result of this increase in the number of shares, the basis per share must decrease. This is because the total investment cost is now spread over a greater number of shares. For instance, if an investor originally purchased 100 shares at $10 each, their total investment basis is $1,000. After a 10% stock dividend, the investor would then own 110 shares. The total basis remains the same at $1,000, but now that basis is divided by 110 shares, leading to a basis per share of approximately $9.09. This principle ensures that the investor's total investment value remains constant while the individual share basis adjusts accordingly to reflect the increased share count. Thus, the correct answer regarding what happens to the basis per share after a stock dividend is indeed that it decreases.