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.

  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. Does a stock split lead to the gapping up/down of the stock?

    If a company splits its stock, there will be no gapping of the stock due to the split itself. A stock split does not materially ... Read Answer >>
  3. What happens to the value of a mutual fund when a stock splits?

    Find out what happens to the value of a mutual fund when a stock in its portfolio splits, including how stock splits work ... Read Answer >>
  4. How does a company decide when it is going to split its stock?

    Learn why some companies decide to split their shares, and understand how they think it helps the stock's liquidity and future ... Read Answer >>
  5. 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

    Understanding Stock Splits

    We explain what they are, the thinking behind them as well as their results.
  2. 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. ...
  3. Investing

    Berkshire's Stock Splits: Good Buy Or Goodbye?

    Warren Buffett's Berkshire Hathaway recently split its stock. Is this a sign to buy?
  4. 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.
  5. Investing

    Don't Let Stock Prices Fool You

    Find out why a stock with a six-figure share price can still be a good value.
  6. Investing

    How To Profit From Stock Splits And Buybacks

    If stock splits and buybacks have been a bit of a mystery to you, you're not alone. Learn some great tips.
  7. Investing

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  8. Investing

    Narrow Your Range With Stop-Limit Orders

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

    When brokers split up larger orders to qualify them for the Small ...
  5. Gather In The Stops

    A trading strategy of driving down a stock's price by selling ...
  6. Stop Order

    An order to buy or sell a security when its price surpasses a ...
Hot Definitions
  1. Perkins Loan

    A loan program that provides low-interest student loans to undergraduate and graduate students who demonstrate exceptional ...
  2. Wealth Management

    A high-level professional service that combines financial/investment advice, accounting/tax services, retirement planning ...
  3. Assets Under Management - AUM

    The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked ...
  4. Subprime Auto Loan

    A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official ...
  5. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  6. Federal Debt

    The total amount of money that the United States federal government owes to creditors. The government's creditors include ...
Trading Center