An investment strategy designed to limit losses on a security by means of setting up a stop-loss order or stop-limit order. For example, a protective stop may involve an investor giving an order to his/her broker to sell a stock if its price drops more than 5% below what the investor paid. So, if the investor paid $30 per share, the protective stop would mean selling automatically if the price reached $28.50. Protective stops are risk averse and assume that if the price reaches (in this case) $28.50, it will continue its downward trend.
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A stop order that protects gains or limits losses of an existing investment position.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.