Proteolytic cleavage of β‐amyloid precursor protein (βAPP) by α‐secretase results in release of one secreted form (sAPP) of APP (sAPPα), whereas cleavage by β‐secretase releases a C‐terminally truncated sAPP (sAPPβ) plus amyloid β‐peptide (Aβ). βAPP mutations linked to some inherited forms of Alzheimer's disease may alter its processing such that levels of sAPPα are reduced and levels of sAPPβ increased. sAPPαs may play important roles in neuronal plasticity and survival, whereas Aβ can be neurotoxic. sAPPα was ∼100‐fold more potent than sAPPβ in protecting hippocampal neurons against excitotoxicity, Aβ toxicity, and glucose deprivation. Whole‐cell patch clamp and calcium imaging analyses showed that sAPPβ was less effective than sAPPα in suppressing synaptic activity, activating K⁺ channels, and attenuating calcium responses to glutamate. Using various truncated sAPPα and sAPPβ APP695 products generated by eukaryotic and prokaryotic expression systems, and synthetic sAPP peptides, the activity of sAPPα was localized to amino acids 591–612 at the C‐terminus. Heparinases greatly reduced the actions of sAPPαs, indicating a role for a heparin‐binding domain at the C‐terminus of sAPPα in receptor activation. These findings indicate that alternative processing of βAPP has profound effects on the bioactivity of the resultant sAPP products and suggest that reduced levels of sAPPα could contribute to neuronal degeneration in Alzhiemer's disease.