A:

A stop order, commonly referred to as a stop-loss order, is an order placed with a broker to sell a security when it reaches a pre-determined price. Stop-orders are designed to limit an investor's losses in the case of a decline in stock value. In the situation of a stock split, a company decides to divide its existing shares into multiple shares. For instance, in a 2:1 stock split the shares of a company are divided into two and shareholders receive an additional share for every share that he or she currently owns, while the value of each share is divided in half. Therefore stock splits have no material effect on the total value, or market capitalization of the firm.

In a situation where an investor has arranged for a stop-order at a price below the current stock price and the stock is then split, the stop order becomes null and void. Some believe that in this situation the stop order will be treated as a market order, however this is not the case. All stop orders will be canceled and traders will have to place new orders to reflect the adjusted stock price. Any brokerage that executed a stop order in the wake of a stock split would immediately lose any credibility and would not have many clients soon after. (To learn more about stock splits, read What Is A Stock Split? Why Do Stocks Split?)

This question was answered by Lovey Grewal.

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