We have different types of participants in the financial market such as day traders, scalpers, swing traders, positions traders and investors. Based on their requirements, they place orders with specific instructions to buy or sell at a price. Based on these requirements, brokers have provided different order types to choose while placing a buy or sell order on their trading platforms.
In this article, let us understand these order types that most stock brokers provide in their trading platform to buy or sell a security.
Let’s start with limit order first.
Limit order
Limit order is a type of order that specifies the maximum price at which the market participant is willing to buy or the minimum price at which he or she is willing to sell a security.
You use limit order when your expectation is to execute a trade at a specific price or better.
In a limit order, you do one of the following:
● Buy only if the share falls to a certain price or lower.
● Sell only if the share rises to a certain price or higher.
Buy limit order
When you want to buy a security at a price lower than the current market price, you can place a buy limit order.
For instance, if you want to purchase a security which is currently trading at Rs 110, and you place a buy limit order at Rs 98, your order will only get executed if the market price reaches or falls below Rs 98.
Sell limit order
When you own a security and want to sell it at a price higher than the current market price, then you can place a sell limit order.
For example, if you have a stock that is currently trading at Rs 110, and you place a sell limit order at Rs 115, your order will be executed if the market price reaches or exceeds Rs 115.
Limit order gives you more control on the price at which your order will be executed. If the market did not reach the price which you specified, then your order will not be executed.
Market Order
Market order is a straightforward order in which you instruct your broker to buy or sell a security at the best available price in the market at the time the order is placed.
You place a market order when the security is immediately required and you are willing to accept the current market price. A market order will be executed immediately based on liquidity of the stock at the prevailing market price in exchange.
Market order has a higher probability of execution compared to a limit order. However, you may have slippages due to market volatility.
In limit order, you have control over the price at which you want to buy or sell a security, but there is no guarantee of execution. In market order, you don’t have control over the price, but you have certainty of execution.
Traders and investors use both orders based on market conditions and requirements.
Stop loss order
Stop loss order is placed to limit potential losses. It’s very critical for limiting your losses. Many professional traders use it for risk management.
In it, you set a trigger price. When the stock reaches that price, your order gets executed.
Trigger price is the price level at which you want the order to become active. Trigger price should be below the current market price for a long position or above it for a short position.
Your stop loss order will remain inactive until the market price of the security reaches or falls below (for long positions) or reaches or rises above (for short positions) the trigger price.
Once the stop loss order is activated, it goes to exchange for execution. If you have set a stop loss limit order with the trigger price, then it will be executed as a limit order. If not specified, then execution will be at the market price.
Cover order
Cover order is a combination of limit / market order and a stock loss order placed simultaneously. Many traders use it when they want to initiate a trade with built-in stock loss to limit potential losses. It’s used to manage risk.
When your limit / market order is executed, the system automatically places a stop loss as specified by you. After placing this, you need not place a separate stop loss order.
Bracket order
A bracket order places three orders simultaneously. In it you place a target price, stock loss price and limit/market order price simultaneously.
Many advanced traders use this type of order as a part of their trading strategy. It allows you to automate both profit taking and risk management.
When your main order is executed, the system places target and stop loss order simultaneously. When target or stop loss is executed, the other order automatically gets cancelled.
What is order validity?
If you place a day order, the validity is for the trading day. Your order either executed during the trading day or gets automatically cancelled if not executed.
When you select IOC, it means either execute immediately or cancel the order. Either buy or sell the stock instantly or don’t execute at all.
In Good till date (GTD) or valid till date (VTD), you specify a future date for your order to execute. If conditions are met, order will be active until execution or the date mentioned whichever is earlier.
In Good till cancelled (GTC), the order remained valid until it’s manually cancelled.
