Different market participants, such as traders, investors, DIIs, and FIIs participate in the Indian stock markets through exchanges where they place orders to buy or sell stocks, ETF’s, derivatives, etc. In this blog, we will understand what an order is and the different types of orders that market participants can place on the stock exchanges.
What is an order in the stock market?
An order is a command to execute a trade. This command is typically for buying or selling stocks, bonds, ETFs, REITs, and other tradable instruments. A retail investor or trader will use their stock broker’s trading application on their mobile or web interface to place an order. The order will then be executed on the stock exchange.
Types of Orders in the Stock Market:
When a new user tries to buy a stock for the first time on a broker’s app, it can be a difficult experience because of the many options available. We will try to understand these different options to make buying or selling stock easier for you.
ORDER TYPES BASED ON TIME HORIZON:
There are two types of orders based on the time horizon of the trade.
- DELIVERY ORDER: You must place a delivery order when you want to buy and hold stock for over a day. Once purchased, the stock units will be transferred to your demat account by the stock exchange. You should also choose this category when you want to sell stocks you previously bought and have been holding in your demat account.
- INTRADAY ORDER: When you want to buy and sell a stock within the same day, you must place an intraday order. You can close the order by placing a sell order, or your stock broker will close it at prevailing market prices per their time limits. (Note: Your broker may charge you for closing intraday trades on your behalf).
Intraday order VS Delivery order
|INTRADAY ORDER||DELIVERY ORDER|
|Stockbroker can provide leverage up to 5 times on intraday cash trades.||The stockbroker on delivery trades does not provide leverage.|
|Intraday orders are time bound and must be closed before the trading session ends.||You can sell your delivery holdings whenever you wish to.|
|Shorting of stocks can be done using intraday orders.(Selling first and then buying them to close the trade)||Shorting is not allowed while placing delivery trades.|
ORDER TYPES BASED ON PRICE:
When buying or selling a stock, you can choose between two order types depending on whether you want to buy a stock at a fixed price or the prevailing market price.
1. LIMIT ORDER
In this type of order, you must specify the price at which you want to buy or sell a stock. If the current market price reaches the limit set by you, the order will get executed, and shares will be bought or sold as per the order. This order type is used when you are in no hurry to buy the stock and are ready to wait till stock price reaches the price at which you are comfortable to buy the stock.
For example, Rajesh wants to buy 100 shares of Reliance at ₹2500 for delivery. However Reliance is currently trading at ₹2505. In this situation, Rajesh will place a delivery order with a limit price option for 100 shares at ₹2500. If, within that day, the price of Reliance reaches ₹2500 and 100 shares are available, the exchange will execute the order; otherwise, the order will automatically get cancelled at the end of the trading session.
2. MARKET ORDER
In this type of order, you do not need to specify a price to buy or sell a stock. As the order is placed, it immediately gets executed at the prevailing market price at which shares are available. This order is generally used during events like data release, news release, and other stock related events there is urgency to buy or sell shares immediately.
For example, Rajesh wants to buy 100 shares of Reliance, which is currently trading at ₹2505 on the exchange. To immediately buy the shares he can place a market order. Once placed the order will get executed and 100 shares will be credited into his trading account.
3. GTT ORDER
A GTT or “Good Till Triggered” order is an order type that gets executed when certain trigger price conditions given by the user get fulfilled. Unlike other order types, GTT orders don’t expire at the end of the trading session but have a validity of 1 year and hence, is used by investors to place a target or stop-loss on their existing long-term holdings.
Most brokers provide GTT order service; you will need to check if this service is available with your broker or not.
ORDER TYPES BASED ON RISK MANAGEMENT:
1. STOP LOSS ORDER
This type of order is used in addition to existing open positions to prevent losses that exceed an investor’s risk-taking ability. As the name suggests, it stops losses from getting deeper. A trigger price must be chosen by you while placing this order. The order will remain dormant until the stock reaches the trigger price. Once triggered, the order will be executed based on whether it is placed as a limit order (SL-L) or a market order (SL-M).
For example, Aniket has an open buy position in Tata Motors that he initiated at ₹400 for 100 shares. In worst case scenario Aniket can afford to lose a maximum of ₹600 on this trade. To manage this position and make sure that he does not lose more than ₹600 in this trade he must make sure that the trade gets closed when ₹394. To ensure this he can place a stoploss order with a trigger price of ₹394.
If the stock price reaches ₹394, the stoploss order will get triggered and the trade will be closed.
2. COVER ORDER
A cover order is a market order with a predefined range of stoploss set by the stockbroker. The benefit of using a cover order is that you do not need to place a stoploss order separately on your open positions. The stoploss trigger price is included with the order and can be modified later.
For example, Ram wants to buy Bajaj Finance which is currently trading at ₹6000 per share. His broker has mentioned the stoploss range for Bajaj Finance as ₹5400-6000 for the day for cover orders. He initiates the position with a stoploss trigger at ₹5600, and the order is executed at the prevailing market price along with the stoploss at ₹5600.
If the stock price becomes equal to ₹5600 before the market closes, then stoploss will get triggered, Ram will lose ₹400 per share, and trade will be closed.
3. OCO ORDER (BRACKET ORDER)
An OCO (One Cancels the Other) or Bracket order is placed based on a predefined risk-reward in mind for any given position before it gets initiated by a trader. It combines three different order types: a buy/sell order, a stoploss order and a target order. The other order will cancel if the stock reaches either the target price or the stoploss trigger price after initiation. If the stoploss gets hit, the target order gets cancelled and vice versa. This order is trendy among intraday traders since they do not need to monitor and close trades manually.
While many order types are available for users to use, it is necessary to understand your requirements beforehand and accordingly place the order to effectively manage risks that arise from trading or investing in equity markets.
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Based on popularity, the three most common stock order types are as follows:
Limit Order: Where the buying or selling price is predefined.
Market Order: Where the buying or selling takes place at the prevailing market price of the stock.
Stop-Loss Order: A dormant order with a trigger price to prevent loss in open positions.
Limit orders are considered the best for investors as they allow them to buy the stock at a price they define. Generally, market orders are more expensive than limit orders, making limit orders better suited for investing.
When the trigger price is reached, a stop-loss order is executed at market prices, while a stop-limit order gets executed only at the limit price fed by the user.
A trigger price is a price at which a stop-loss order gets converted from a dormant to an active state and gets executed at exchange based on either limit placed or prevailing rates, as per the stop-loss order type.
A good stop-loss rule is to have a risk-reward ratio in mind before initiating any position to be calculated based on your capital and follow it thoroughly until the reward is realised or the stop-loss is taken. For example: If you have a Risk-Reward ratio of 1:2 in mind and have bought 100 shares of any stock trading at ₹100 with a ₹10000 capital, then as per the R:R, you should have a stop-loss of ₹100 for ₹200 target profit on the trade.