What are the different types of orders?

4.7

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Here’s the thing about the stock market. Over the years, the trading system has evolved excellently to support the many different needs that traders and investors have. Part of that includes supporting different types of orders, just like any other market. To fully take advantage of the many options available to you, you first need to know what the different types of orders are, and understand how they work. So, let’s get started with the simplest type - the market order.

Market order

A market order is the most basic kind of order. It is an order that is executed immediately, at the best available price. When you place a market order, you do not specify price in the order details. So, if you’re placing a buy order, you don’t mention any purchase price, and if you’re placing a sell order, you don’t specify any sale price. 

But if you don’t mention any price, then, at what price does the order get executed? 

The answer to this is simple. The order is executed at the best price available in the market. 

Take a look at this screenshot, for example. It shows the bid and ask prices for the shares of ICICI Bank.

See the bid prices and the buy quantities, and the offer prices and the corresponding sell quantities? So, if you place a market order to buy shares, the order is executed at the lowest offer price.

  • Say you place a market order to buy 3,000 shares of ICICI Bank. The order will be executed at Rs. 582.10
  • Now, if you place a market order to buy 3,500 shares of ICICI Bank, the first 3,447 shares would be purchased at Rs. Rs. 582.10, and the remaining 53 shares would be purchased at Rs. 582.15.

Similarly, if you place a market order to sell shares of ICICI Bank, the order is executed at the highest bid price.

  • Say you place a market order to sell 1,700 shares of ICICI Bank. The order will be executed at Rs. 582.00
  • Now, if you place a market order to sell 2,000 shares of ICICI Bank, the first 1,728 shares would be sold at Rs. Rs. 582.00, and the remaining 272 shares would be sold at Rs. 581.95.

Since there is no specific price for market orders, they’re easily and almost always executed. This is because the trade occurs immediately, at the best available price. As long as the stock is not illiquid, it’s likely that you would have no trouble executing a market order. 

Things to keep in mind when you’re placing a market order

  • Market orders do not give you any control over the price at which your trade will occur.
  • They are ideal if you want to execute your trade immediately, or as early as possible.
  • They are best placed only during market hours. If you place a market order when the markets are closed, your order will only be executed when the market opens on the next trading day.

Limit order

A limit order is a type of order that is executed at a specified price. Your stockbroker’s trading platform will generally give you the option to choose between market and limit orders. When you choose the limit order option, you need to specify the price at which you wish to purchase or sell the stocks you want to. 

Again, let’s look at a screenshot of ICICI Bank’s stock prices to understand limit orders better.

Here, if you place a limit order to buy the shares of ICICI Bank at a specified price, the order will only be executed at that price, or at a lower price if available.

  • Say you place a limit order to buy 3,000 shares of ICICI Bank at Rs. 583. The order will be executed at Rs. 582.10, since that is a lower, more attractive option.
  • But, if you place a limit order to buy 3,000 shares of the company at Rs. 582, the order will not be executed right away, since the lowest ask price is higher than the price you expect.
  • On the other hand, if you place a limit order to buy 3,500 shares of ICICI Bank at Rs. 583, the first 3,447 shares would be purchased at Rs. Rs. 582.10, and the remaining 53 shares would be purchased at Rs. 582.15, since both those prices are lower, more attractive options.

Similarly, if you place a limit order to sell shares of ICICI Bankat a specified price, the order will only be executed at that price, or at a higher price if available.

  • Say you place a limit order to sell 1,700 shares of ICICI Bank at Rs. 581. The order will be executed at Rs. 582.00, since that is a higher, more attractive option.
  • But, if you place a limit order to sell 1,700 shares of the company at Rs. 584, the order will not be executed right away, since the highest bid price is lower than the price you expect.
  • On the other hand, if you place a limit order to sell 2,000 shares of ICICI Bank at Rs. 581, the first 1,728 shares would be sold at Rs. Rs. 582.00, and the remaining 272 shares would be sold at Rs. 581.95, since both those prices are higher, more attractive options.

Things to keep in mind when you’re placing a limit order

  • A limit order will likely not be executed right away.
  • It can give you a bit of control over the price at which the trade occurs, particularly when the market is highly volatile.
  • If you expect that you can buy at a price lower than, or sell at a price higher than the current price, you could use a limit order.

Stop-loss order

A stop-loss order is exactly what it sounds like - it is an order that you place to limit your losses. A stop-loss order can be placed for both buying and selling a share. To place a stop-loss order, you need to understand one important number - the trigger price. This is the price at which your order is triggered and activated for execution. 

There are two types of stop-loss orders:

  1. Stop-loss market (SL-M)
  2. Stop-loss limit (SL-L)

In a stop-loss market order, you only need to mention the trigger price when you place the order.

In a stop-loss limit order, you need to mention the trigger price as well as the price at which you wish to execute the trade. 

We’ll take an example to make these two types of stop-loss orders clearer.

a. Stop-loss market order:

In a SL-M order, you only need to enter the trigger price. There are two scenarios here:

  1. If you already hold a buy position, you would place a sell SL-M.
  2. And if you already hold a sell position, you would place a buy SL-M.

Scenario 1: You hold a buy position

  • Suppose that you have purchased a stock for Rs. 1,000. 
  • You expect a bullish market, that is, you expect the prices to rise. This is why you have purchased a share. 
  • However, you’re also afraid that the market may move downward, against your expectations, leading to a loss in your position.
  • So, you want to limit your losses to Rs. 50, at most. 
  • This means that if the market is falling, you need to sell the share when its price touches around Rs. 950. That way, your loss would be just Rs. 50.
  • You set a trigger price of Rs. 950, so the order is triggered at that price and sent to the exchange. 
  • It is then executed at the prevailing market price, which could be Rs. 950, or a bit higher or lower than that, owing to the minor time gaps between trigger and execution.

Check out the pictorial representation for this scenario to understand the concept better.

Scenario 2: You hold a sell position

  • Suppose that you have sold a stock for Rs. 1,000. 
  • You expect a bearish market, that is, you expect the prices to fall. This is why you have sold a share. 
  • However, you’re also afraid that the market may move upward, against your expectations, leading to a loss in your position.
  • So, you want to limit your losses to Rs. 20, at most. 
  • This means that if the market is rising, you need to sell the share when its price touches around Rs. 1,020. That way, your loss would be just Rs. 20.
  • You set a trigger price of Rs. 1,020, so the order is triggered at that price and sent to the exchange. 
  • It is then executed at the prevailing market price, which could be Rs. 1,020, or a bit higher or lower than that, owing to the minor time gaps between trigger and execution.

Take a look at the pictorial representation of this order.

b. Stop-loss limit order:

In a SL-L order, you need to enter the trigger price and the price at which you wish to execute the trade. There are two scenarios here:

  1. If you already hold a buy position, you would place a sell SL-L.
  2. And if you already hold a sell position, you would place a buy SL-L.

Scenario 1: You hold a buy position

  • Suppose that you have purchased a stock for Rs. 1,000. 
  • And again, you want to limit your losses to Rs. 50, at most. 
  • So, you need to sell the share when its price touches around Rs. 950. That way, your loss would be just Rs. 50.
  • You set a trigger price of Rs. 952, so the order is triggered at that price and sent to the exchange. 
  • You enter the sale price as Rs. 950.
  • Keep in mind that for a sell stop-loss limit sell order, the trigger price should be greater than or equal to the sale price. 
  • It is then executed at or higher than the sale price, which is Rs. 950. But if the market price is below Rs. 950, the SL-L sell order remains unexecuted. 

Here’s the pictorial representation for this scenario.

Scenario 2: You hold a sell position

  • Suppose that you have sold a stock for Rs. 1,000. 
  • And you want to limit your losses to Rs. 20, at most. 
  • So, you need to buy the share when its price touches around Rs. 1,020. That way, your loss would be just Rs. 20.
  • You set a trigger price of Rs. 1,018, so the order is triggered at that price and sent to the exchange. 
  • You enter the sale price as Rs. 1,020.
  • Keep in mind that for a sell stop-loss limit buy order, the trigger price should be less than or equal to the sale price. 
  • It is then executed at or lower than the buy price, which is Rs. 1,020. But if the market price is above Rs. 1,020, the SL-L buy order remains unexecuted. 

Here’s the pictorial representation for this scenario.

Cover order

A cover order is a hybrid order that involves two orders:

  1. A regular buy/sell order that can be a market or a limit order
  2. An accompanying mandatory stop-loss order to reduce the risk of losses

Case 1: Regular buy order + SL sell order

If you place a regular buy order - either as a market or a limit order - you will need to place a stop loss sell order in the cover order to limit your losses.

  • For instance, say you’re placing a buy order for 1 share of Reliance Industries at Rs. 2,100.
  • In the same cover order, you will also need to specify a trigger price to reduce the loss if the price falls. 
  • Say the trigger price in your SL sell order is Rs. 2,090.
  • So, if the share price of Reliance falls and touches Rs. 2,090, your SL-sell order is triggered, and your share will be sold, limiting your loss.

Case 2: Regular sell order + SL buy order

If you place a regular sell order - either as a market or a limit order - you will need to place an accompanying stop loss buy order in the cover order to limit your losses.

  • For instance, say you’re placing a sell order for 1 share of Reliance Industries at Rs. 2,000.
  • In the same cover order, you will also need to specify a trigger price to reduce the loss if the price rises. 
  • Say the trigger price in your SL sell order is Rs. 2,100.
  • So, if the share price of Reliance rises and touches Rs. 2,100, your SL-buy order is triggered, and a share will be bought at that price, limiting your loss.

Bracket order 

Up until now, we’ve seen how you can limit your losses with stop-loss orders. But it’s equally important to have a target profit in mind too, particularly if you’re trading intraday. Here’s where a bracket order comes into the picture. 

A bracket order is a hybrid order that involves three orders:

  1. A regular buy/sell order that can be a market or a limit order
  2. An accompanying mandatory stop-loss order to reduce the risk of losses
  3. A target or exit price that will help you exit your position if the market moves as anticipated.

A bracket order = Target + Regular order + Stop-loss

  • If the target price is reached and the target order comes into play, the SL is cancelled because you exit your regular position with a profit.
  • On the other hand, if the stop-loss price is reached and the SL order comes into play, the target is cancelled because you exit your regular position with a limited loss.

For example, let’s take these price points:

  1. New buy position: Rs. 100
  2. Target price: Rs. 120
  3. Stop-loss price: Rs. 90
  • Now, if the market moves upward, your share will be sold when the price reaches Rs. 120. Your SL order is cancelled and you take home a profit of Rs. 20.
  • But, if the market moves down, your share will be sold if the price touches Rs. 90, and your loss is limited to Rs. 10

Wrapping up

That sums up the main types of orders that you can place in the market. In the next chapter, we’ll discuss some important numbers that you should keep in mind while placing orders. Keep reading, and of course, keep learning with Smart Money!

A quick recap

  • A market order is the most basic kind of order. It is an order that is executed immediately, at the best available price. When you place a market order, you do not specify price in the order details. So, if you’re placing a buy order, you don’t mention any purchase price, and if you’re placing a sell order, you don’t specify any sale price. 
  • A limit order is a type of order that is executed at a specified price. When you choose the limit order option, you need to specify the price at which you wish to purchase or sell the stocks you want to. 
  • A stop-loss order is exactly what it sounds like - it is an order that you place to limit your losses. A stop-loss order can be placed for both buying and selling a share. 
  • To place a stop-loss order, you need to understand one important number - the trigger price. This is the price at which your order is triggered and activated for execution. 
  • There are two types of stop-loss orders: Stop-loss market (SL-M) and Stop-loss limit (SL-L).
  • In a stop-loss market order, you only need to mention the trigger price when you place the order.
  • In a stop-loss limit order, you need to mention the trigger price as well as the price at which you wish to execute the trade. 
  • A cover order is a hybrid order that involves two orders: A regular buy/sell order that can be a market or a limit order and an accompanying mandatory stop-loss order to reduce the risk of losses.
  • A bracket order is a hybrid order that involves three orders: A regular buy/sell order that can be a market or a limit order, an accompanying mandatory stop-loss order to reduce the risk of losses, and a target or exit price that will help you exit your position if the market moves as anticipated.
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