Have you ever tried to buy stocks? If you have tried to purchase stocks, you would have seen different types of stock orders. Some types of orders may execute immediately, some execute at a specific time or specific price, while others might have additional conditions linked.
What type of Market Orders and Stop Loss you choose can make a big difference in the buying price of a stock and the returns you earn, so it is important to be familiar with various types of stock orders and in what situation they are appropriate.
Types of Stock Market Orders
When trading volatile stocks or trading in a fast-moving market, a small slippage can make a huge difference between profit and loss. Hence, it is important to understand trade orders beyond traditional buy and sell options. Here are different types of trade orders that you need to know:
1. Market Order
A market order is when the investor requests for immediate execution of sale or purchase of a security. While the order type can guarantee the order execution, it doesn’t guarantee the price at which the order will be executed. Generally, the market order will execute at or close to the current bid price or ask price. An investor can choose to provide either simple or complex order instructions that the broker or trading market venues can access.
When investors choose to trade using the market order, they don’t have control over the final price on which the trade gets executed. The order execution correlates to the availability of sellers and buyers.
Example: Suppose the current market price of XYZ stock is INR 100. An investor place a market order to buy the stock at the same price. The order will be executed immediately. However, there is no guarantee that the execution price of the order will be INR 100 because the market is volatile and the price of the stock will fluctuate every second. The last traded price of the stock in the market might have changed by the time the investor bids the order.
However, the execution price of the order will be close to the bid price, provided the stock is well traded on the stock exchange. Investors can choose to split market orders. By splitting the market order, there may be multiple price points caused by multiple participations in the transaction.
2. Limit Orders
If you want that your order should be executed at a specific price, you should place a limit order. With a limit order, you will have to determine a specific price to buy or sell a security. The order will execute only when there is a buyer or a seller that will buy or sell the security at the specified price. A buy limit order will only execute at the limit price or below.
Example: If an investor wants to buy XYZ stock for not more than INR 100 per share, the investor will have to place a limit order at INR 100. Once the price of the share reaches INR 100, the order will be executed. A selling price will be similar, the order will only execute when the price of the stock reaches the set limit price or exceeds.
A limit order can also have other requirements like all or none (AON) or Fill or Kill (FOK). When FOK is selected, the order either is executed or is killed completely. While with an AON request, the order is either filled or not filled. If it is not filled, the request will not be closed but will remain in the book until executed.
3. Stop Order
A stop-loss or stop-loss order is a type of order that is designed to limit the loss of investors on a position. A stop-loss order will be executed when it reaches a specific price. It is one of the most important types of orders as it helps investors limit their losses by exiting the trade when the stock reaches a certain price. Investors can save themselves from incurring high losses by placing a stop-loss order if the prices of the stock go against the expectations.
When an investor places a buy order, he expects the price to rise so he can earn profits. But when the prices start falling instead of rising, a stop-loss order can be at the rescue. A stop-loss order is placed below the buy price and is executed when the stock prices reach the level.
Example: An investor places a buy order of XYZ stock at INR 100 with a stop loss at INR 98. He expects the price of the stock to rise but the price starts falling and it falls to INR 95. When the price reaches INR 98, a loss of INR 2 per stock will be booked and the stock will be sold at INR 98.
4. Cover Order
A cover order allows the users to take an intraday position and take benefit of extra exposure while protecting themselves through a stop order. In cover order, two orders are placed simultaneously, a limit or market order, and a corresponding stop loss market order which only gets triggered at the specified stop-loss price. When the trigger price is hit, the stop-loss order is executed.
5. Bracket Order
Bracket order is an advanced intraday order accompanied by a target and stop-loss order. The order resembles a bracket that helps the investors automate their trades. It is a combination of three simultaneous orders: a limit order (first leg), a stop loss market order (second leg), and a corresponding profit objective limit order (third leg).
If the stop loss trigger point is hit, the stop-loss order gets executed as a market order and the third leg order is canceled automatically. While, if the profit objective price is hit, the second leg or stop loss gets canceled.
Bracket order helps investors limit any potential loss that could be incurred on a position while allowing them to book profits at a specified target price.
It is important for a retail investor to understand different types of orders in the market to trade effectively. Choosing the right type of order can help them maximize their profits in the market.
What is Stop Loss?
Stop loss is an advanced order to sell a stock when it reaches a specific trigger price. It is used to limit the loss in a trade. It is suitable for both short term and long term trading. Stop loss is an automatic order that investors place with the broker. When stop loss order is places, the investors instructs the broker to sell the security when the price reaches the specified price limit.
Types of Stop loss orders:
1. Stop Loss Order
It is an order where the investors set a price to exit the order when the price doesn’t go as expected. This order must be used for a sell position.
Example: There is a sell position at INR 100 and the stop-loss price is placed at 102. If the price of the stock reaches INR 102, the investor will exit the order with a buy order. The buy order for the trade will be executed at the market price.
The order is placed by the investors to ensure that the exit trade is executed when the prices go against expectations. In the stop-loss market order, there is a trigger price. If the buy order is placed and the price of the stock drops to trigger price, the trade will exit at any price available in the market.
If there is high volatility in the price of the stock, there will be more loss with stop loss market order.
2. Stop Loss Limit Order
A stop-loss limit order is similar to stop loss market order but the order gets executed at the specified limit price. In this order, the investors are required to put a trigger price and a limit price. This order must be used for a buy position.
Example: An investor places a stop-loss limit order when he already has a long position at INR 1000. The investor places a stop loss at INR 990 and triggers the price of INR 991. When the price of the stock falls to INR 991, it will trigger a sell order at INR 990 and the order will get executed when the price of the stock reaches INR 990.
3. Trailing Stop Loss
Trailing Stop loss order is a modification to the stop-loss order that is intended to help the investors lock in profits. The order lets the investors set a percentage of loss they can incur on a trade. If the price of the stock rises or falls in the favor, the stop-loss price moves with it. Whereas, if the price rises or falls against the predictions of the investor, the stop loss stays in place.