Protective Stop

You're an active trader. You make dozens (if not hundreds) of trades a day. Just before lunch, you purchase shares of NFLX at $370. You're going to go out for a sandwich. You're pretty sure the stock will rise while you're at the deli, but you don't want to suffer a huge loss if you're wrong. You'll be away from your trading desk, so you can't respond in real time if something happens.

You put on a protective stop (also known as a stop-loss order). It's a limit order that kicks in if the stock falls to a certain price.

You put in your protective stop at $350. While you're waiting for your lean pastrami on rye, news breaks. NFLX has discovered that it only has one customer left: one person who has been sharing their password with 500 million other people.

Stock drops hard. By the time you get back to your desk, shares are down to $150 a share. But you only lost $20 per share. The protective stop kicked in at $350. It automatically sold your shares, making sure that you didn't suffer too much in the bloodbath.