Types of order in stock market - stocksaim

The evolution of the internet has made our daily lives much easier. As an investor today, you can buy and sell stocks by yourself 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 in order 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 nothing but an instruction that an investor gives to buy or sell stocks on a trading platform or to a stock broker. There are different order types in the market.

Here are a few

Here are a few important order types you should know :

Types of orders in stock market - stocksaim

1* Market Order

A market order is an order to buy or sell a stock at the market’s current best available price. A market order typically ensures an execution, but it does not guarantee a specified price. Market orders are optimal when the primary goal is to execute the trade immediately. A market order is generally appropriate when you think a stock is priced right, when you are sure you want a fill on your order, or when you want an immediate execution.

A few caveats: A stock’s quote typically includes the highest bid (for sellers), lowest offer (for buyers), and the last trade price. However, the last trade price may not necessarily be current, particularly in the case of less-liquid stocks, whose last trade may have occurred minutes or hours ago. This might also be the case in fast-moving markets, when stock prices can change significantly in a short period of time. Therefore, when placing a market order, the current bid and offer prices are generally of greater importance than the last trade price.

Generally, market orders should be placed only during market hours. A market order placed when markets are closed would be executed at the next market open, which could be significantly higher or lower from its prior close. Between market sessions, numerous factors can impact a stock’s price, such as the release of earnings, company news or economic data, or unexpected events that affect an entire industry, sector or the market as a whole.

2* Limit Order

A limit order allows you to place an order in a security at the price you want. So, a buy limit order means you are ready to buy the security at a specific price or lower. And a sell limit order means you wish to sell the security at the limit price or higher. There is however no guarantee that this order will get executed, unlike Market Orders.

This can be understood better through an example.

If you put a buy limit order for a stock at Rs 50, it means that you are ready to buy the stock at a price equal to or lower than Rs 50. Similarly, a sell limit order for a stock at Rs 50 means that you would like to sell the stock at Rs 50 or higher.

The best part is that this helps you ensure you don’t have to follow the stock trend every second to get the right price. The limit order automates your trading to a certain degree. Such orders can last for a day, a few weeks and sometimes even a month or more.

3* Stop Order

A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the “stop price”). If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. If the stock fails to reach the stop price, the order is not executed.

A stop order may be appropriate in these scenarios:

  • When a stock you own has risen and you want to attempt to protect your gain should it begin to fall
  • When you want to buy a stock as it breaks out above a certain level, believing that it will continue to rise

A sell stop order is sometimes referred to as a “stop-loss” order because it can be used to help protect an unrealized gain or seek to minimize a loss. A sell stop order is entered at a stop price below the current market price; if the stock drops to the stop price (or trades below it), the stop order to sell is triggered and becomes a market order to be executed at the market’s current price. This sell stop order is not guaranteed to execute near your stop price. 

A stop order may also be used to buy. A buy stop order is entered at a stop price above the current market price (in essence “stopping” the stock from getting away from you as it rises).

Let’s revisit our previous example, but look at the potential impacts of using a stop order to buy and a stop order to sell—with the stop prices the same as the limit prices previously used.

While the two graphs may look similar, note that the position of the red and green arrows is reversed: the stop order to sell would trigger when the stock price hits $133 (or below), and would be executed as a market order at the current price. So, if the stock were to fall further after hitting the stop price, it’s possible that the order could be executed at a price that’s lower than the stop price. Conversely, for the stop order to buy, once the stop price of $142 is reached, the order could be executed at a higher price.

4* Stop Limit Order

A stock-limit order is a conditional trade order that combines the features of a stop and limit order. A stop-limit order requires placing two prices – the stop price and the limit price. Once the stock hits the stop price, the order becomes a limit order. Stop-limit orders, as opposed to a stop order, guarantee a price limit. On the other hand, a stop order guarantees an order execution but not necessarily at the stop order price.

For example, an investor currently owns a stock trading at 200. The investor would like to sell the stock if it dips below 180, but only if the stock can be sold at 170 or more. The investor sets a stop-limit order by setting a stop price of 180 and a limit price of 170. Once the stock drops below 180, the order becomes a 170 limit order.

5* Trailing Stop Order

A trailing stop order is similar to a stop order. However, a trailing stop order is based on the percentage change in market price as opposed to a specific target price. Although a trailing stop order is generally associated with a long position, it can also be used with a short position. In such a case, the stock will be purchased if it increases by a determined percentage.

For example, an investor purchases a stock at a price of $10. The investor places a trailing stop order of 20%. If the stock declines 20% or more, the order will be executed.

6* Cover Order

A cover order is a combination of 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 due to the leverage that is given in Cover Order, this SLTP needs to fall within defined ranges depending on the security and your broker. Through a cover order, you can get the advantage of lowering your risk and ensuring that your losses are limited.

7* MIS (Market Intraday SquareOff Order)

As the name suggests, this is an intraday order. This means, each order needs to be squared off during a single trading day. This gives you the advantage of benefitting from the market fluctuations during the day. And in case you don’t close the trade before 3:00 PM, the trade gets automatically squared off or closed.

Since each trade is squared off in a single day, you are allowed a greater amount of leverage. In investing parlance, leverage is the amount of money you can borrow in order to place a trade. In such orders, you pay a fraction of the amount you are trading. The broker pays the rest of the amount.

8* Bracket Order (BO)

Bracket order combines the benefits of multiple orders placed simultaneously allowing you to fully automate a particular purchase or sale in a given security.

It essentially consists of 3 Legs or individual orders, which allows you to place a buy or sell order, its target order as well as its stop loss order. This results in a fully covered order being placed on the exchange allowing you to both automatically book profits as well as automatically cover losses.

The only caveat is that Bracket Orders typically will have time period restricted to a single day and may not be accessible for longer time frames.

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