Unleash Your Financial Wizardry: Master the 2026 Financial Statement Analysis Test!

The correct answer is stock splits. A stock split occurs when a company increases the number of its outstanding shares by issuing more shares to existing shareholders, proportional to their current holdings. As a result, the stock price is adjusted downward to maintain the overall market capitalization of the company. For example, in a 2-for-1 stock split, a shareholder with one share will then own two shares, but the price of each share is halved.

Stock splits are conducted to make the shares more affordable to a wider range of investors, improve liquidity, and make the stock appear more attractive without changing the overall value of the company.

In contrast, stock dividends distribute additional shares to shareholders but do not change the number of total shares in the same way as stock splits. Share buybacks reduce the number of shares outstanding by repurchasing shares in the market, while option grants involve giving employees or others the right to purchase shares at a predetermined price, which does not involve proportionate increases in the number of shares. Therefore, among the given options, stock splits is the most accurate term for proportional increases in the number of shares outstanding.