The Stock Stethoscope

Rapid digitisation has now made it very easy for anyone to begin trading in the stock market. In today’s internet era, one can trade in stocks online from the comfort of one’s home and with the click or tap of a button. It is just like online shopping, where an individual can place an order to buy or sell stocks. That is known as ‘order’ in stock market terms.

What is an Order in the stock market?

An order is essentially an instruction given by the investor or trader to his/her broker or broking platform. This is used for executing, buying and selling of stocks. In stock markets, there are different types of orders that can be executed depending on one’s preference. All kind of orders may not provided by all the brokers, however, basic order types like market order, limit order, stoploss orders etc. are available on all broking platforms.

Here, we will discuss the concept of ‘Orders’ in stock markets and the different types of orders that investors or traders should know about. An investor or trader can make use of different order types in the stock market. Depending on the order type, the broker or broking platform will initiate the trade on behalf of the investor.

Types of orders in stock markets:

Listed here are some of the most commonly used order types in Indian stock markets:

Market Order:

A market order can be placed by an investor when he/she wants to buy or sell a security at market prices. Such orders have immediate execution since the price used is the latest market price. Although the exact price at which the order will be executed is not guaranteed since the market price keeps flactuating, an investor can expect a guarantee of order execution in this category.

Suppose the current market price of a stock XYZ is Rs. 100. If an investor places a market order to invest in this stock, it will be executed immediately. However, there’s no guarantee that the stock will be bought at the ‘ask’ price of Rs. 100. The buy order may get executed at Rs. 99 or Rs. 98 or Rs. 100 or Rs. 100.15, Rs. 101, Rs. 102 etc. or any other closer price. Same is true for the case, when the investor wants to sell his/her stock by placing market order.

The reason behind the possibility of price differential is due to constant market volatility that results in prices fluctuations every second. By the time an investor places a market order, the last-traded price of the stock may have already changed. However, an investor still gets to execute a trade at a price that is somewhat closer to the bid or ask price. This also depends on how liquid the stock is.

Limit Order:

A limit order allows investors to place an order for buying or selling a stock at a specific price he/she wants.

Buy Limit Order & Sell Limit Order:

A BUY LIMIT ORDER means that an investor is willing to buy security only at a specific price or lower and a SELL LIMIT ORDER means that an investor wishes to sell the security at a specific price or higher. Unlike market orders, after placing a limit order, there is no guarantee that the order will get executed.

Suppose an investor places a buy limit order for a stock at a price of Rs. 100. This means that the investor is willing to buy the stock only at Rs. 100 or lower. If he/she places a sell limit order for a stock at Rs. 100, it means that he/she is willing to the stock only at a price of Rs. 100 or more.

This type of order allows investors to ensure that they don’t follow price trends of stocks and can aim for the right price. A limit order can also help in automating trades to a certain extent. These types of orders, once placed, can last for a trading day, a few weeks or even a month.

Stop Order:

This type of order for buying or selling a stock is executed only once the stock price reaches a stated price. Such stock price or value is called the ‘stop price’. Until the stock price triggers the stated price, this type of order will remain dormant. Only once the specified price is achieved, the stop order converts into a market order or limit order and gets executed. This order type is also known as a stop-loss order.

Suppose an investor comes to know that he/she may likely suffer a huge loss if a stock’s price falls below Rs. 50. Since he/she cannot constantly track the stock price, he/she can use a stoploss order to sell the stock as soon as the stock hits a specific price. Thus, the investor can avoid a significant loss.

It is very useful for investors or traders to reduce risk, who lack the required time to constantly track and accordingly execute trades during a trading day.

Stop-Loss Market Order:

In this case, once the trigger price is reached, the Stop loss order gets converted into a Market order

Stop-Loss 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, if an investor currently owns a stock trading at Rs.30. The investor would like to sell the stock if it dips below Rs. 25 to minimise his loss, but only if the stock can be sold at Rs. 24 or more. The investor sets a stop-loss limit order by setting a stop price of Rs. 25 and a limit price of Rs 24. Once the stock drops below Rs.25, the order becomes a Rs. 24 limit order.

Trailing Stop loss order :

A Trailing Stop-loss is an order that lets you set a maximum value or percentage of loss you can incur on a trade. If the security price rises or falls in your favor, the trigger price jumps with it at the set value or percentage. If the security price rises or falls against you, the trigger price stays in place.

For example, an investor purchases a stock at a price of Rs.100. The investor places a trailing stop order of 20%. If the stock declines 20% or more, the order will be executed.

Cover order:

This order type acts as a combination of a market order and a stop-loss order. A buy or sell order, in this case, is always a market order. If an investor would like to specify a Stop-Loss Trigger Price (STLP) and the limit price, he/she can minimise the risk exposure through this type of order. Since a cover order involves the use of leverage, the SLTP must be within defined price ranges that depend on the stock and the broker. A cover order helps in minimising losses.

Margin Intraday Square Off Order (MIS) :

Under this intraday order type, each order must be squared off (closed) within the same trading day. Here, if the order is not closed before 3: 20 PM on a given trading day, the trade is automatically squared off or closed. This is mainly useful for traders who want to benefit from intraday market fluctuations.

It allows much higher leverage as each trade is squared off within the trading day. Leverage means the amount of money one can borrow for trading. In these types of orders, one can pay only a portion of the total amount that is required for trading, as the broker pays the balance.

Bracket Order (BO) :

Bracket order features the benefits of different orders that are simultaneously placed. This allows investors to completely automate any buy or sell transaction.

It primarily involves 3 parts or individual orders. This includes placing a buy or sell order, the target order, and the corresponding stop-loss order. Thus, an investor can place a fully covered order on the exchange that ensures automatic booking of profits and automatic covering of losses.

An important point to note in Bracket orders is that it involves a time period that is restricted to a single trading day and investors cannot access it for a longer time horizon.

Immediate or Cancel (IOC):

An IOC order mandates that whatever amount of an order that can be executed in the market (or at a limit) in a very short time span, often just a few seconds or less, be filled and then the rest of the order canceled. If no shares are traded in that “immediate” interval, then the order is canceled completely.

Good Till Triggered (GTT) :

The Good till triggered (GTT) feature is provided by brokers like Zerodha works like an order that is active until the trigger condition is met. This trigger will be valid for one year. So, anytime the price condition within this period is met, your order will be placed and executed, provided there are enough funds in the trading account, and your limit price order is filled on the exchange. This trigger set is valid only once, so if the order is placed and not executed for any reason, the GTT has to be placed again.

OCO (One Cancels the Other) :

In an OCO trigger, you can set stop-loss and target trigger %. When either of the triggers is hit, the order is placed at the exchange and the other trigger is cancelled.

After Market Order:

After Market Order (AMO Order)
An After Market Order is an order that is placed after-market hours when markets are closed. Stock markets in India remain open from 9:15 am to 3:30 pm for trading.

An After Market Order is especially useful for those investors who are busy during market hours but wish to trade. All stock brokers do not offer the After Market Order facility to their clients. The brokers who provide this facility specifically indicate the timings when After Market Orders are accepted.

Conclusion:

It is important that investors know about the different orders types in the stock market along with the unique features that these offer. This will help investors choose the right order type for maximising profits while dealing in the stock market.Since stock trading involves high levels of risk, sufficient knowledge about the order types will help investors decide the right order that will suit their objective. This can help in minimizing losses and achieving the target price