Definition of Stock Split

Stock split is a change in the number of outstanding shares, the par value and the number of authorized shares, which has been approved through a vote of the shareholders. Forward stock splits increase the number of shares outstanding and reduce the stock price, in order to make the security more attractive to individual investors.

Applying "Stock Split" to Securities Exams:

A corporation from time to time may wish to split its shares to make them more attractive to investors. A forward stock split will increase the number of shares and reduce the price of the security in the market place. Individual investors generally feel more comfortable purchasing shares of a $20 than shares of a $200 stock. If a stock price has declined a corporation may want to reverse split its shares to increase the price to make the stock more attractive to institutional investors. Institutions generally feel more comfortable purchasing shares of a $50 stock than shares of a $5 stock.

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