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. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Find out more about book value of equity per share, what BVPS measures and how to determine what level of BVPS indicates ...
  2. What is the effective interest method of amortization?

    Find out more about the effective interest rate method and how the effective interest method is used to amortize a discounted ...
  3. Is there a way to include intangible assets in book-to-market ratio calculations?

    Find out more about the book-to-market ratio and how to calculate a public company's book-to-market ratio including its intangible ...
  4. How does the effective interest method treat the interest on a bond?

    Find out why you should look at the effective interest of a bond rather than simply relying on its stated coupon rate when ...
RELATED TERMS
  1. At The Lowest Possible Price

    A type of security trading designation that instructs a brokerage ...
  2. At The Highest Possible Price

    A type of security trading designation that instructs a brokerage ...
  3. Bidding Up - Securities

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

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

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

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

You May Also Like

Related Articles
  1. Economics

    Tech Startup Momentum Being Generated ...

  2. Active Trading Fundamentals

    Who are Charles Schwab's (SCHW) main ...

  3. Investing Basics

    Here's How To Tap International Markets

  4. Investing News

    Looking To Invest In U.S Start-Ups? ...

  5. Investing Basics

    How a Stock Buyback Works: MasterCard

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!