The evolution of the internet has made our daily lives much easier. As an investor today, you can buy and sell stocks right from the comfort of your home or office. To do so, you need to place an order with your broker, who then places a request to sell or buy stocks on your behalf.
But to get the best outcome possible, it is necessary that you know the different types of orders in the market.
What is an order?
An order is an investor’s instruction to buy or sell stocks on a trading platform or to a stock broker. There are different order types in the market. Depending on the order type, the broker or broking platform with initiate the trade on behalf of the investor.
Market order vs Limit order-
Every investor should know the two major types of orders are the market order and the limit order.
Market Orders-
A market order is the most basic type of trade. It is an order to buy or sell immediately at the current price. Typically, if you buy a stock, you will pay the price at or near the posted ask. You will receive a price at or near the posted bid if you sell a stock.
A market order generally will execute at or near the current bid (for a sell order) or ask (for a buy order) price. However, investors need to remember that the last traded price differs from the price at which a market order will be executed. This type of order guarantees that the order will be executed but does not guarantee the execution price.
For example, imagine that the current market price of stock X is Rs 120. You place a market order to buy the stock at this price. Your order will be executed immediately. However, there’s no guarantee that the security is purchased at the ‘ask’ price of Rs 120.
This is because the market is volatile; prices fluctuate every second. And the last-traded price in the market may have already changed by the time you bid on your order. However, you would receive a price closer to your bid price, provided the stock you’re buying is well-traded or “liquid.”
Limit order–
A limit order allows investors to place an order to buy or sell a stock at the price they want. A buy limit order means the investor is willing to buy security only at a specific price or lower price. A sell limit order means they wish to sell the security at a particular price or higher. Unlike market orders, there is no guarantee that they will get executed after placing a limit order.
Suppose an investor places a buy limit order for a stock at Rs. 100. This means that the investor is willing to buy the stock only at Rs. 100 or lower. If they place a sell limit order for a stock at Rs. 100, they are willing to sell it only at Rs. 100 or more.
This type of order allows investors to ensure that they don’t follow the price trends of stocks and can aim for the right price. A limit order can also help in automating trades to a certain extent. Once placed, these orders can last for a trading day, a few weeks, or even a month.
There are four types of limit orders:
Buy Limit-
An order to purchase a security at or below a specified price. Limit orders must be placed on the right side of the market to ensure they will accomplish the task of improving the price. This means putting the order at or below the current market bid for a buy limit order.
Sell Limit-
An order to sell a security at or above a specified price. The order must be placed at or above the current market ask to ensure an improved price.
Buy Stop-
An order to buy a security at a price above the current market bid. A stop order to buy becomes active only after a specified price level has been reached (known as the stop level). Buy stops are orders placed above the market and sell stop orders are placed below the market. Once a stop level has been reached, the order will be immediately converted into a market or limit order.
Sell Stop-
An order to sell a security at a price below the current market ask. Like the buy stop, a stop order to sell becomes active only after a specified price level has been reached.
Additional Stock Order Types
Now that we’ve explained the two main orders, here’s a list of some added restrictions and special instructions that many different brokerages allow on their orders:
Stop order
This is an order to buy or sell stock whenever the stock price reaches a specific value. This value is known as the ‘stop price.’ The stop order remains dormant until this price is reached. And once the price is reached, the stop order becomes a market or limit order, and your order is placed.
A stop-loss order is helpful if you need more time to track and execute stop losses on your trades during the day. For example, you know you would face a significant loss if stock X falls below Rs 35. But since you cannot monitor the stock regularly, you can put a stop order to sell it once it reaches this level.
This way, you can avoid a major loss. That’s the reason why this type of order is also known as a ‘stop-loss’ order.
Stop-Limit Order
These are similar to stop-loss orders, but as their name states, there is a limit on the price at which they will execute. There are two prices specified in a stop-limit order: the stop price, which will convert the order to a sell order, and the limit price. Instead of the order becoming a market order to sell, the sell order becomes a limit order that will only execute at the limit price or better. This can mitigate a potential problem with stop-loss orders triggered during a flash crash when prices plummet but subsequently recover.
Cover order
A cover order combines a market order and a stop-loss order. This means your buy (or sell) order is always a market order. In addition, you would also have to specify a Stop-Loss Trigger Price (STLP) and the limit price. This way, your risk exposure in the market automatically reduces.
However, this SLTP needs to fall within defined ranges depending on the security and your broker due to the leverage given in Cover Order. Through a cover order, you can get the advantage of lowering your risk and ensuring that your losses are limited.
Margin Intraday Square Off Order (MIS)
Under this intraday order type, each order must be squared off within a given trading day. Here, the trade is automatically squared off or closed if the order is not closed before 3:00 PM on a given trading day. This is mainly useful for traders who want to benefit from intraday market fluctuations.
It allows much higher leverage as each trade is squared off within the trading day. Leverage means the amount of money one can borrow for trading. In these orders, one can pay only a portion of the total amount required for trading, as the broker pays the balance.
Bracket Order (BO)
Bracket order features the benefits of different charges that are simultaneously placed. This allows investors to automate any buy or sell transaction ultimately.
It primarily involves three parts or individual orders. This includes placing a buy or sell order, the target order, and the corresponding stop-loss order. Thus, an investor can place a fully covered order on the exchange that ensures automatic booking of profits and automatic covering of losses.
An important point to note in Bracket orders is that it involves a period restricted to a single trading day, and investors cannot access it for a longer time horizon.
Immediate or Cancel (IOC)
An IOC order mandates that whatever amount of an order can be executed in the market (or at a limit) in a brief period, often just a few seconds or less, be filled and canceled. The order is canceled if no shares are traded in that “immediate” interval.
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