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.
Related or Semi-related Video
Finance: What are Limit Order, Sell Limi...4 Views
Finance a la shmoop what is a limit order? you want to sell a thousand shares
of Colonel electric it was demoted after they cut their dividend the shares have [Scissors cuts dividend in half]
been trading wildly between $15 and $25 a share you don't want to feel like a
moron for having sold them at fifteen bucks when six weeks later they kissed
25 with tongue so what do you do well you put in a limit order that is you put
a limit of a minimum price of 25 bucks a share for Colonel Electric such that [Pile of stocks appear]
those shares will simply sit in your account unsold maybe forever until
somebody out in the wild blue yonder of Stockland is willing to pay twenty five [Woman standing at a colonel electric stand]
dollars or more for the shares where you have a minimum price limit of 25 bucks a
share in your order so here's to hoping they sell and don't get further demoted [Man carries stock into car]
Sargent Electric is just a place you don't want to go
Up Next
What are Buy Stop and Sell Stop Orders? An investor makes a buy stop order; the buy stop tells the broker to purchase an asset when its price becom...