Financial Terms Stock split

# Definition of Stock split

## Stock split

Occurs when a firm issues new shares of stock but in turn lowers the current market price of its
stock to a level that is proportionate to pre-split prices. For example, if IBM trades at \$100 before a 2-for-1
split, after the split it will trade at \$50 and holders of the stock will have twice as many shares than they had
before the split. See: split.

## stock split

Issue of additional shares to firmâ€™s stockholders.

# Related Terms:

## Reverse stock split

A proportionate decrease in the number of shares, but not the value of shares of stock
held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a
1-for-3 split would result in stockholders owning 1 share for every 3 shares owned before the split. After the
reverse split, the firm's stock price is, in this example, worth three times the pre-reverse split price. A firm
generally institutes a reverse split to boost its stock's market price and attract investors.

## High price

The highest (intraday) price of a stock over the past 52 weeks, adjusted for any stock splits.

## Last split

After a stock split, the number of shares distributed for each share held and the date of the
distribution.

## Price/book ratio

Compares a stock's market value to the value of total assets less total liabilities (book
value). Determined by dividing current stock price by common stockholder equity per share (book value),
adjusted for stock splits. Also called Market-to-Book.

## Price/earnings ratio (PE ratio)

Shows the "multiple" of earnings at which a stock sells. Determined by dividing current
stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio is
determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher
"multiple" means investors have higher expectations for future growth, and have bid up the stock's price.

## Price/sales ratio (PS Ratio)

Determined by dividing current stock price by revenue per share (adjusted for stock splits).
Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares
outstanding.

## Return on equity (ROE)

Indicator of profitability. Determined by dividing net income for the past 12
months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors
use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets
(ROA) multiplied by financial leverage (total assets/total equity).

## Acquisition of stock

A merger or consolidation in which an acquirer purchases the acquiree's stock.

## Adjustable rate preferred stock (ARPS)

Publicly traded issues that may be collateralized by mortgages and MBSs.

## American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

## Auction rate preferred stock (ARPS)

Floating rate preferred stock, the dividend on which is adjusted every
seven weeks through a Dutch auction.

## Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

## Common stock

These are securities that represent equity ownership in a company. Common shares let an
investor vote on such matters as the election of directors. They also give the holder a share in a company's
profits via dividend payments or the capital appreciation of the security.

## Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.

## Common stock equivalent

A convertible security that is traded like an equity issue because the optioned

## Common stock market

The market for trading equities, not including preferred stock.

## Common stock ratios

Ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.

## Conflict between bondholders and stockholders

These two groups may have interests in a corporation that
conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective
covenants work to resolve these conflicts.

## Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.

## Convertible preferred stock

Preferred stock that can be converted into common stock at the option of the holder.

## Cumulative preferred stock

Preferred stock whose dividends accrue, should the issuer not make timely
dividend payments. Related: non-cumulative preferred stock.

## Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

## Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

## Employee stock fund

A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.

## Employee stock ownership plan (ESOP)

A company contributes to a trust fund that buys stock on behalf of
employees.

## Exchange of stock

Acquisition of another company by purchase of its stock in exchange for cash or shares.

## Growth stock

Common stock of a company that has an opportunity to invest money and earn more than the
opportunity cost of capital.

## Income stock

Common stock with a high dividend yield and few profitable investment opportunities.

## Letter stock

Privately placed common stock, so-called because the SEC requires a letter from the purchaser
stating that the stock is not intended for resale.

## Listed stocks

stocks that are traded on an exchange.

## Listed stocks

stocks that are traded on an exchange.

## Margin account (Stocks)

A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

## New York Stock Exchange (NYSE)

Also known as the Big Board or The Exhange. More than 2,00 common
and preferred stocks are traded. The exchange is the older in the United States, founded in 1792, and the
largest. It is lcoated on Wall Street in New York City

## Non-cumulative preferred stock

Preferred stock whose holders must forgo dividend payments when the
company misses a dividend payment.
Related: Cumulative preferred stock

A securities exchange where American and European foreign
currency options on spot exchange rates are traded.

## Preferred equity redemption stock (PERC)

Preferred stock that converts automatically into equity at a
stated date. A limit is placed on the value of the shares the investor receives.

## Preference stock

A security that ranks junior to preferred stock but senior to common stock in the right to
receive payments from the firm; essentially junior preferred stock.

## Preferred stock

A security that shows ownership in a corporation and gives the holder a claim, prior to the
claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most
preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar
amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares
characteristics of both common stock and debt.

## Preferred stock agreement

A contract for preferred stock.

## Repurchase of stock

Device to pay cash to firm's shareholders that provides more preferable tax treatment
for shareholders than dividends. Treasury stock is the name given to previously issued stock that has been
repurchased by the firm. A repurchase is achieved through either a dutch auction, open market, or tender offer.

## Split

Sometimes, companies split their outstanding shares into a larger number of shares. If a company with 1
million shares did a two-for-one split, the company would have 2 million shares. An investor with 100 shares
before the split would hold 200 shares after the split. The investor's percentage of equity in the company
remains the same, and the price of the stock he owns is one-half the price of the stock on the day prior to the split.

## Split-fee option

An option on an option. The buyer generally executes the split fee with first an initial fee,
with a window period at the end of which upon payment of a second fee the original terms of the option may
be extended to a later predetermined final notification date.

## Split-rate tax system

A tax system that taxes retained earnings at a higher rate than earnings that are
distributed as dividends.

## Stock

Ownership of a corporation which is represented by shares which represent a piece of the corporation's
assets and earnings.

## Stock dividend

Payment of a corporate dividend in the form of stock rather than cash. The stock dividend
may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders.
stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock
dividends are not taxed until sold.

## Stock exchanges

Formal organizations, approved and regulated by the Securities and Exchange Commission
(SEC), that are made up of members that use the facilities to exchange certain common stocks. The two major
national stock exchanges are the New York stock Exchange (NYSE) and the American stock Exchange (ASE
or AMEX). Five regional stock exchanges include the Midwest, Pacific, Philadelphia, Boston, and Cincinnati.
The Arizona stock exchange is an after hours electronic marketplace where anonymous participants trade
stocks via personal computers.

## Stock repurchase

A firm's repurchase of outstanding shares of its common stock.

## Stock selection

An active portfolio management technique that focuses on advantageous selection of
particular stocks rather than on broad asset allocation choices.

## Stockholder equity

Balance sheet item that includes the book value of ownership in the corporation. It
includes capital stock, paid in surplus, and retained earnings.

## Stock index option

An option in which the underlying is a common stock index.

## Stock market

Also called the equity market, the market for trading equities.

## Stock option

An option in which the underlying is the common stock of a corporation.

## Stock replacement strategy

A strategy for enhancing a portfolio's return, employed when the futures
contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills
portfolio and a stock portfolio.

## Stock ticker

This is a lettered symbol assigned to securities and mutual funds that trade on U.S.financial exchanges.

## Stockholder

Holder of equity shares in a firm.

## Stockholder's books

Set of books kept by firm management for its annual report that follows Financial
Accounting Standards Board rules. The tax books follow IRS tax rules.

## Stockholder's equity

The residual claims that stockholders have against a firm's assets, calculated by
subtracting total liabilities from total assets.

## Stockout

Running out of inventory.

## Treasury stock

Common stock that has been repurchased by the company and held in the company's treasury.

## BOOK VALUE OF COMMON STOCK

The theoretical amount per share that each stockholder would receive if a companyâ€™s assets were sold on the balance sheetâ€™s date. Book value equals:
(stockholdersâ€™ equity) / (Common stock shares outstanding)

## Earnings per share of common stock

How much profit a company made on each share of common stock this year.

## RATE OF RETURN ON STOCKHOLDERSâ€™ EQUITY

The percentage return or profit that management made on each dollar stockholders invested in a company. Hereâ€™s how you figure it:
(Net income) / (stockholdersâ€™ equity)

## RATIO OF DEBT TO STOCKHOLDERSâ€™ EQUITY

A ratio that shows which groupâ€”creditors or stockholdersâ€”has the biggest stake in or the most control of a company:
(Total liabilities) / (stockholdersâ€™ equity)

## STOCK

Certificates that signify ownership in a corporation. A share of stock represents a claim on a portion of the companyâ€™s assets.

## STOCKHOLDERSâ€™ (OR OWNERSâ€™) EQUITY

The value of the ownersâ€™ interests in a company.

See inventory.

## Common stock

Shares of ownership sold to the public.

## No par value stock

stock issued by the company that does not have an arbitrary value (par value) assigned to it.

## Stated value stock

stock issued by the company that does not have a par value, but does have a stated value. For accounting purposes, stated value is functionally equivalent to par value.

## Stockholders' equity

The total amount of contributed capital and retained earnings; synonymous with shareholdersâ€™ equity.

## Treasury stock

Shares that were sold to the public but have since been repurchased by the company in the open market. Treasury stock is deducted from the equity section, and is therefore a contraequity account.

## capital stock

corporation may issue more than one class of capital stock shares.
One class may give voting privileges in the election of the directors of the
corporation while the other class does not. One class (called preferred
stock) may entitle a certain amount of dividends per share before cash
dividends can be paid on the other class (usually called common stock).
stock shares may have a minimum value at which they have to be issued
(called the par value), or stock shares can be issued for any amount
(called no-par stock). stock shares may be traded on public markets such
as the New York stock Exchange or over the Nasdaq network. There are
on this number). In this regard, I find it very interesting that there are
more than 8,000 mutual funds that invest in stocks.

## stockholders' equity, statement of changes in

Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the ownersâ€™ equity
accounts of a business during the periodâ€”including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting ownersâ€™ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
ownersâ€™ equity accounts.

## Common Stock

A financial security that represents an ownership claim on the
assets and earnings of a company. This claim is valid after the
claims of the debt providers and preferred stockholders have been
satisfied.

## Cost of Common Stock

The rate of return required by the investors in the common stock of
the company. A component of the cost of capital.

## Cost of Preferred Stock

The rate of return required by the investors in the preferred stock of
a company. A component of the cost of capital.

## Preferred Stock

A type of equity security where holders have a claim on the assets
and earnings of a company after the debt providers but before the
holders of common stock. Preferred stock generally pays a fixed
or floating rate dividend each year.

## approximated net realizable value at split-off allocation

a method of allocating joint cost to joint products using a
simulated net realizable value at the split-off point; approximated
value is computed as final sales price minus
incremental separate costs

## Employee Stock Ownership Plan (ESOP)

a profit-sharing compensation program in which investments are made in
the securities of the employer

## net realizable value at split-off allocation

a method of allocating joint cost to joint products that uses, as the proration base, sales value at split-off minus all costs necessary
to prepare and dispose of the products; it requires
that all joint products be salable at the split-off point

## safety stock

a buffer level of inventory kept on hand by a company in the event of fluctuating usage or unusual delays in lead time

## sales value at split-off allocation

a method of assigning joint cost to joint products that uses the relative sales values of the products at the split-off point as the proration basis; use of this method requires that all joint products
are salable at the split-off point

## split-off point

the point at which the outputs of a joint process are first identifiable or can be separated as individual products

## stock appreciation right

a right to receive cash, stock, or a combination of cash and stock based on the difference between a specified dollar amount per share of stock and the quoted market price per share at some future date

## stock option

a right allowing the holder to purchase shares of common stock during some future time frame and at a specified price

## stockout

the condition of not having inventory available
upon need or request

## Preferred stock

A type of stock that usually pays a fixed dividend prior to any distributions
to the holders of common stock. In the event of liquidation, it must be paid
off before common stock. It can, but rarely does, have voting rights.

## Sales value at split-off

A cost allocation methodology that allocates joint costs to joint
products in proportion to their relative sales values at the split-off point.

## Split-off point

The point in a production process when clearly identifiable joint costs
can be identified within the process.

## Stock certificate

A document that identifies a stockholderâ€™s ownership share in a corporation.

## Stockholder

A person or entity that owns shares in a corporation.

## Stock option

A right to purchase a specific maximum number of shares at a specific
price no later than a specific date. It is a commonly used form of incentive compensation.

## Unissued stock

stock that has been authorized for use, but which has not yet been
released for sale to prospective shareholders.

## common stock

Ownership shares in a publicly held corporation.

## preferred stock

stock that takes priority over common stock in regard to dividends.

## stock dividend

Distribution of additional shares to a firmâ€™s stockholders.

## stock repurchase

Firm buys back stock from its shareholders.

## treasury stock

stock that has been repurchased by the company and held in its treasury.