What effect does a two for one stock split have?

When a company announces a two-for-one stock split, each existing share is divided into two shares, which leads to an increase in the total number of shares outstanding. As a result, if an investor had one share before the split, they will now have two shares after the split.

At the same time, the stock price adjusts to reflect the increased number of shares. Specifically, the price per share will be halved. For example, if the stock was trading at $100 before the split, it would trade at approximately $50 after the split. This adjustment maintains the overall market capitalization of the company because while the number of shares increases, the value of the investment remains the same.

Thus, selecting the option indicating that the stock price drops by half while the number of shares outstanding doubles accurately describes the economic effect of a two-for-one stock split. This split structure is designed to make the stock more accessible to a broader range of investors by reducing the price per share without affecting the total equity held by shareholders.