Exploring Different Types of Trade Orders
What is trade order?
A trade order is an instruction given by an investor to their broker or brokerage firm to buy or sell a particular financial instrument, such as stocks, bonds, options, or commodities, at a specified price or within a specified time frame.
Trade orders are typically placed through electronic trading platforms or by phone with a broker. A trade order can be executed immediately or at a later time, depending on the type of order and the market conditions.
Register Now ! and Get Free Stock Market Courses |
Types of trade orders
There are several types of trade orders that investors can use to buy or sell financial instruments, including:
1.Market order
A market order is a type of trade order that instructs a broker or brokerage firm to buy or sell a security immediately at the best available price in the market. With a market order, the trade is executed as soon as possible, and the investor receives the prevailing market price, which may be higher or lower than the current quoted price.
Limitations of Market Orders
Market orders can be risky in highly volatile markets where the price of a security can change rapidly.
The price received for a market order may be significantly different from the current quoted price, leading to a larger than expected gain or loss.
2. Limit order:
A limit order is a type of trade order that instructs a broker or brokerage firm to buy or sell a security at a specified price or better. With a limit order, the investor sets a specific price at which they are willing to buy or sell a security, and the order is only executed if the market price reaches that price or better.
For example, if an investor wants to buy shares of a company but only at a price of Rupees 50 or less, they would place a limit order to buy the shares at Rupees 50 or less.
If the market price of the stock drops to Rupees 50 or lower, the order will be executed, and the investor will buy the shares at that price or better. However, if the market price never drops to Rupees 50 or lower, the order will not be executed.
Limitation of Limit order
They may not be executed if the market price does not reach the specified limit price, which could cause the investor to miss out on a buying or selling opportunity.
limit orders may take longer to execute than market orders, especially if the limit price is significantly different from the current market price.
3. Stop order:
A stop order, also known as a stop-loss order, is a type of trade order that instructs a broker or brokerage firm to sell a security when it reaches a specific price. Stop orders are used to limit potential losses and protect an investor’s portfolio from excessive declines.
With a stop order, the investor sets a specific price at which they want to sell the security if the price falls below a certain level. For example, if an investor owns a stock that is currently trading at 100 Rupees per share and they want to limit their potential loss to 5 Rupees per share, they would place a stop order to sell the stock at 95 Rupees per share.
Limitations of Stop Loss Order:
It may result in selling or buying a security at a loss if the price briefly dips below the stop loss level before rebounding. This is known as slippage and can happen in fast-moving or volatile markets, which can result in a higher execution price than the investor had intended.
They may not be executed at the specified price if the market is illiquid or experiencing significant price gaps. This can result in a lower execution price than the investor had intended or even a failed execution.
4. Stop-limit order:
A stop-limit order is a type of trade order that combines features of a stop order and a limit order. This order instructs a broker or brokerage firm to sell a security when it reaches a specific price, but only if a certain price limit can be met.
With a stop-limit order, the investor sets a stop price and a limit price. The stop price is the price at which the order is triggered, while the limit price is the lowest price the investor is willing to accept for the security.
For example, let’s say an investor owns a stock that is currently trading at Rupees 100 per share, and they want to limit their potential loss to Rupees 5 per share. They would place a stop-limit order to sell the stock at a stop price of Rupees 95 and a limit price of Rupees 94.
If the market price of the stock falls to Rupees 95, the stop price is triggered, and the order becomes active. If the price falls to Rupees 94 or below, the limit price is triggered, and the order is executed at the best available price between Rupees 95 and Rupees 94.
disadvantage
they may not be executed if the market price falls too quickly and bypasses the limit price. This can result in the investor missing out on the opportunity to sell their security and limit their losses.
5. Trailing stop order:
A trailing stop order is a trade order type that allows an investor to set a stop price at a certain percentage or dollar amount below the current market price of a security. As the market price of the security rises, the stop price is adjusted accordingly, so that it remains a certain percentage or dollar amount below the market price.
For example, if an investor buys a stock at Rupees 100 per share and sets a trailing stop order at 10%, the stop price will initially be set at Rupees 90 per share. If the market price of the stock rises to Rupees 110 per share, the stop price will also rise to Rupees 99 per share (10% below Rupees 110). If the market price then falls to Rupees 105 per share, the stop price will be adjusted to Rupees 94.50 per share (10% below Rupees 105).
Trailing stop orders can help investors limit their potential losses while also allowing them to benefit from the upside potential of a security. If the market price of the security rises, the stop price will also rise, allowing the investor to capture more gains. However, if the market price falls, the stop price will also fall, limiting the investor’s potential losses.
6. Cover order:
A cover order instructs the broker to buy back the shares that were borrowed and sold, in order to cover the short position. This is done when the market price of the security reaches a certain price, known as the cover price.
For example, if an investor has sold short 100 shares of a stock at Rupees 50 per share, they may place a cover order to buy back the shares at a cover price of Rupees 45 per share. If the market price of the stock falls to Rupees 45 or below, the cover order will be triggered, and the broker will automatically buy back the shares to cover the short position.
Cover orders can be useful for managing risk in a short position, as they provide a way for the investor to limit their potential losses if the market price of the security rises. They can also be used in conjunction with other trade orders, such as stop-loss orders or limit orders, to further protect the investor’s position.
7. Margin Intraday Square Off Order (MIS)
Margin Intraday Square Off (MIS) is a trade order type used in the Indian stock market. It is a facility offered by brokers to their clients to trade in the equity segment using leverage.
A Margin Intraday Square Off (MIS) order allows the trader to buy or sell stocks at a higher quantity than they would be able to using their available funds. Essentially, the broker provides the trader with a margin or loan to trade in the market, with the expectation that the trader will close their position before the end of the trading day.
The trader is required to square off their position before the end of the trading day, which means they need to either sell the stocks they bought or buy back the stocks they sold. If the trader fails to square off their position, the broker will automatically square off the position before the end of the trading day.
MIS orders can be useful for traders who want to take advantage of short-term price movements in the market but do not have the funds to execute trades at full value. However, they can also be risky, as traders may incur losses if the market moves against them. It is important for traders to use proper risk management strategies when trading with leverage.
8. Immediate or Cancelled Order
An Immediate or Cancelled (IOC) order is a type of trade order used in the stock market that instructs the broker to execute the trade immediately or cancel the order. When an investor places an IOC order, they are specifying that they want the trade to be executed immediately at the best available price in the market. If the entire order cannot be filled immediately, the unfilled portion of the order is canceled.
For example, suppose an investor wants to buy 1,000 shares of a stock at the current market price of Rupees 50 per share. They place an IOC order to buy 1,000 shares at the current market price. If there are only 500 shares available at Rupees 50 per share, the broker will fill that portion of the order immediately, and the remaining 500 shares will be canceled.
However, investors should be aware that an IOC order may not always provide the best price for the trade, as it is executed at the current market price, which may not be the best price available. As with any trade order, investors should carefully consider their risk tolerance and investment objectives before using an IOC order.
9. Good till cancelled (GTC) Order
A Good till Cancelled (GTC) order is a type of trade order used in the stock market that remains active until it is executed or canceled by the investor. When an investor places a GTC order, they specify the price at which they want to buy or sell the security and how long they want the order to remain active. The order will remain in the market until it is executed or the investor cancels it, regardless of how long it takes.
For example, suppose an investor wants to buy a stock at a specific price of Rupees 50 per share but believes the price is currently too high. They place a GTC order to buy the stock at Rupees 50 per share, with the instruction to keep the order active until it is filled or canceled. If the stock price drops to Rupees 50 per share, the order will be filled, and the investor will acquire the shares. If the stock price never reaches Rupees 50 per share, the order will remain active until the investor cancels it.
10. After Market Order
An After Market Order (AMO) is a type of trade order used in the stock market that allows investors to place orders outside of regular trading hours. In most stock markets, regular trading hours occur between 9:30 am and 4:00 pm, but the AMO facility allows investors to place orders before the market opens or after the market closes. The orders are then executed once the market reopens.
For example, an investor may want to place an order to buy a stock after the market closes at 4:00 pm, based on information they have received after the regular trading hours. They can place an AMO with their broker, specifying the price and quantity at which they want to buy the stock. The order will be executed the following trading day once the market opens.
12. Cash & Carry or CNC
Cash and Carry (CNC) is a type of trade order used in the stock market that involves buying and holding a security for a longer period of time. It is also known as Delivery Order or Buy Today Sell Tomorrow (BTST) order in some markets. When an investor places a CNC order, they are essentially buying a security with the intention of holding it for more than one trading day.
The investor pays for the full value of the securities upfront using their own funds, and the securities are then credited to their demat account. The investor can then choose to sell the securities at any point in the future, or hold onto them for an extended period of time.
For example, suppose an investor wants to buy 100 shares of a company for a long-term investment. They place a CNC order to buy the shares, and the purchase price is debited from their trading account. The shares are then credited to their demat account, and the investor can hold onto the shares for as long as they want, sell them when they see fit, or use them as collateral for a margin trading account.
Register Now ! and Get Free Stock Market Courses |
Also Read More :
In this post i have discussed about different types of trade orders in stock market. Identify which types of order suites you for your trade to reduce risk and to save money.
FAQs
Q1. What are the different types of stock market orders?
Ans. The different types of stock market orders are:
Market Order: Buying and selling of stocks at the current market price.A market order is executed immediately at the current price.
Limit Order: An order to buy or sell a stock at a specific price.
Stop Order: An order to buy or sell a stock once it reaches a certain price, known as the stop price.
Stop-Limit Order: An order to buy or sell a stock once it reaches a certain price, known as the stop price, but with a specified limit price
Q2. What is the difference between a market order and a limit order?
Ans. The main difference between a market order and a limit order is the price at which the order is executed. A market order is executed immediately at the current market price, while a limit order is executed only at the specified price or better. Market orders offer immediate execution, while limit orders offer greater control over the execution price.
Q3. When should I use a stop order?
Ans. A stop order can be used to limit losses or protect profits. For example, a stop order can be placed to sell a stock if its price drops to a certain level, limiting potential losses. Conversely, a stop order can be placed to buy a stock if its price rises to a certain level, protecting potential profits.
Q4. What is slippage in stock market orders?
Ans. It can occur in situations where there is a delay between the time the order is placed and the time it is executed, or when there is insufficient liquidity in the market. Slippage can result in a worse execution price for the order than expected, leading to higher costs or lower profits.
Q5. Can I cancel a stock market order?
Ans. Yes, you can cancel a stock market order before it is executed.