What happens to a stop order after a stock splits?

By Investopedia Staff AAA
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 long does it take a broker to confirm a trade after it is placed?

    Learn about placing trades with a broker and the amount of time required to received confirmation of different types of orders, ...
  2. How do you know if a trade placed to a broker is confirmed?

    Learn how to check if trades placed with brokers online or over the telephone have been filled and confirmed. Explore different ...
  3. How can I get a mutual fund prospectus?

    Read and understand the prospectus before investing in a mutual fund. You can obtain a copy from the fund company, your financial ...
  4. Can I purchase mutual funds for my IRA?

    Learn how to invest your IRA assets in mutual funds. Discover a few of the different types of mutual funds available for ...
RELATED TERMS
  1. Bidding Up - Securities

    The act of increasing the price an investor is willing to pay ...
  2. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  3. Closing Offset (CO) Order

    A limit order that allows the purchase or sale of a security ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches ...
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  6. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
Related Articles
  1. Schwab may not be the first company to offer a robo-advisor, but it's sure to make a big splash. Here's what it'll look like.
    Professionals

    Robo-Adviser Wave Gets Big Push From ...

  2. Fundamental Analysis

    Can Good News Be A Signal To Sell?

  3. Entrepreneurship

    7 Steps To A Successful Investment Journey

  4. Economics

    Introduction To Asian Financial Markets

  5. Investing Basics

    5 Statements Commonly Made By Amateur ...

Trading Center