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.

RELATED FAQS
  1. How and why does a stock split?

    Learn why stock splits do not occur very often for individual stocks, and understand the impact of reverse stock splits on ... Read Answer >>
  2. How are dividends affected by a stock split?

    I was reading about stock splits and most articles seem neutral on effects of a stock split. Will the dividend remain ... Read Answer >>
  3. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Answer >>
  4. What are reverse stock splits?

    A reverse stock split is a corporate action in which a company reduces the number of shares it has outstanding by a set multiple. ... Read Answer >>
  5. Why would a company perform a reverse stock split?

    Understand what a reverse stock split entails, and learn what the common motivations are for a company to perform a reverse ... Read Answer >>
  6. Can a mutual fund's shares split?

    Learn about mutual fund share splits and why they occur, including how splits and reverse splits affect share price and total ... Read Answer >>
Related Articles
  1. Investing

    Stock Splits: A Closer Look At Its Effects

    Most trades, including short sales and options, aren't materially affected by a stock split. Still, it's important for shareholders to understand how these events impact various aspects of investing. ...
  2. Investing

    Berkshire's Stock Splits: Good Buy Or Goodbye?

    Warren Buffett's Berkshire Hathaway recently split its stock. Is this a sign to buy?
  3. Investing

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  4. Markets

    Do Stock Splits Cause Volatility?

    Since stock splits decrease the stock price, do they also increase volatility because shares are traded in smaller increments? Investopedia examines assumptions about this increasingly common ...
  5. Markets

    Understanding Stock Splits

    Find out how stock splits work and how they affect investors.
  6. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  7. Trading

    How To Start Trading: Order Types

    The types of orders you use can have a large effect on your trading performance, so understanding the different order types is important to your success.
  8. Investing

    Protect Yourself From Market Loss

    There are several simple strategies you can use to protect yourself from downside risk.
  9. Managing Wealth

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  10. Trading

    The Basics Of Trading A Stock

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
RELATED TERMS
  1. Reverse Stock Split

    A corporate action in which a company reduces the total number ...
  2. Split Adjusted

    A modification made to a security's price that takes into consideration ...
  3. Reverse/Forward Stock Split

    A stock split strategy that includes the use of a reverse stock ...
  4. Gather In The Stops

    A trading strategy of driving down a stock's price by selling ...
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  6. Closing Price

    The final price at which a security is traded on a given trading ...
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center