Protective Stop

AAA

DEFINITION of 'Protective Stop'

A strategy designed to protect existing gains or thwart further losses by means of a stop-loss order or limit order. A protective stop is set to activate at a certain price level and assures that an investor will make a predetermined profit or lose a predetermined amount. For example, if one buys a stock for $50 and wishes to limit losses to 10%, one would simply set a protective stop at $45.

INVESTOPEDIA EXPLAINS 'Protective Stop'

Although a protective stop is considered to be a risk-averse strategy, it can also be profit averse. Because it assumes that a stock will continue to fall past the exit target, a protective stop can sometimes backfire with volatile stocks that have a wide trading range. Hence, it is prudent to consider the behavior of the security when using or setting a protective stop.

RELATED TERMS
  1. Stop-Loss Order

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

    An order placed with a brokerage to buy or sell a set number ...
  3. Material Amount

    The movement of a security's price to the extent that it confirms ...
  4. Above The Market

    An order to buy or sell at a price set higher than the current ...
  5. Below The Market

    An order to buy or sell a security at a price that is lower than ...
  6. Market Order

    An order that an investor makes through a broker or brokerage ...
Related Articles
  1. Trailing-Stop Techniques
    Active Trading Fundamentals

    Trailing-Stop Techniques

  2. Principal Trading and Agency Trading
    Investing Basics

    Principal Trading and Agency Trading

  3. Understanding Order Execution
    Investing Basics

    Understanding Order Execution

  4. A Look At Exit Strategies
    Active Trading Fundamentals

    A Look At Exit Strategies

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center