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Stock split definition

A simple accounting procedure that creates no value but seems to trip up the beginner. Until now.

Beginner

An accounting procedure initiated by the Board of Directors to change the price of a stock so it is more palatable for the intended shareholder base. In a 2-for-1 split, the number of shares doubles and the price is cut in half. It is like splitting a pie into 8 pieces instead of 4. If a pie is worth $8, in four pieces the value is $2 per slice, and in 8 pieces the price is $1 per slice. So there is no change in value. Some active managers interpret stock splits as evidence of confidence from management and expect positive abnormal returns, but this point is debated in academic circles.

Synonym: split


Other Original Content

Quiz

Click box for answer.

A stock with a higher price is more expensive. | True or False?

False. Expensive is a valuation concept, price doesn't matter because you can always change the number of shares.

In a Sentence

Doc:  Tom, will you explain to the class the concept of a stock split ?
Tom:  A whole pizza pie sells for $16, or two halves for 8 bucks each.

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Related Terms

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Keywords:
stock split
corporate action
accounting procedure
2-for-1 split
management confidence
academic
stock perormance
portfolio accounting
shareholder