What occurs during a stock split?

During a stock split, the number of outstanding shares increases while the price per share decreases proportionally. This action is typically undertaken by a company when its stock price has risen to a level that may be considered too high for some investors. By splitting the stock, the company enhances its liquidity and makes it more accessible to a broader base of investors.

For example, in a 2-for-1 split, each shareholder receives one additional share for every share they own, effectively doubling the number of shares in circulation. However, the overall value of the shareholders’ investment does not change immediately because the price per share is halved. Thus, the total market value of the company remains unchanged right after the split.

This mechanism can help to attract new investors who may have limited capital to invest in high-priced shares, thereby potentially increasing trading activity. The increase in the number of outstanding shares is the critical aspect of this process that aligns with the correct answer.