Various Types of Orders
Online trading platforms, as we discussed in our last unit, have created a whole host of useful tools that simplify trading on the market. Another useful tool is different types of orders. Let us discuss them in this section.
A market order is an order to buy or sell a security at the best bid/ask rate in the orderbook.
Say for example: Mr. X intends to buy five shares of Mphasis Ltd. If he uses a market order, the trade will be executed at the best ask rate in the order book.
Likewise, a market order to sell five shares shall be executed at the best bid rate.
It is not advisable to place a market order for illiquid stocks.
In a limit order, the trader can set a specific price at which he is willing to buy or sell a security.
For instance, Mr. X intends to buy five shares of Mphasis Ltd at a price of ₹3388.6. He can simply place a limit order and wait for the trade to be executed at the desired price of ₹3388.6 or lesser.
Likewise, limit orders can also be used to sell the security at a pre-specified price of ₹3388.6 or better.
It is advisable to use limit orders in illiquid stocks or during volatile movements to execute the trade at a favourable price.
Stop-Loss order is an order where a trader can limit his or her losses by exiting a trade if the stock reaches a specific price.
When a trader purchases a stock, he expects its price to rise. However, it is equally probable that the stock moves against him. A trader can place a stop-loss order to automatically exit the position when the stock reaches a certain level.
For instance, a trader places a buy order:
- Buy Price- ₹3388.6
- Stop loss - ₹3383.6
In case the price falls below ₹3388.6, say it falls to ₹3383.6. The stop-loss sell order will be executed. When the trigger price is breached, the stoploss order goes into the system order book as a limit order, and is executed. The trader will book a loss of ₹5 per share and exit the trade.
After Market Orders (AMO)
After market orders are orders that are placed beyond the normal market timings. It is suitable for those investors who are pre-occupied during the day & do not have time to actively track the price of the security.
AMO trades are executed at market opening. The exact timing between which AMOs can be placed varies from broker to broker. The investor can specify the price (limit order) at which he wants to buy the security or simply buy the stock at the prevailing market price (market order).
Based on Time Duration
Also based on time duration, there can be:
1. Good for Day Order – order will be valid only till the end of the current trading session.
2. Good till Cancelled Order – the order is valid until and shall be executed at the desired price unless cancelled.
3. Immediate or Cancel Order (IOC) - The order once placed will be executed immediately, if it is not executed it shall be cancelled. IOC orders might be partially executed. Stop-loss orders cannot be placed using the IOC route.
Placing a buy or sell order: Once you enter all the information correctly i.e., the quantity and type of order, you can go ahead with placing an order by clicking on the “Place” button. It creates an order packet and displays it to you. Then, you need to confirm if the packet is created correctly by clicking on the “confirm button” and once you click on the confirm, your order is sent to the market. A unique numbered Id is created for your order and each order is time-stamped before sending it to the broker.
The broker’s server sends an acknowledgment as soon as the order is received by it. Then, the broker verifies all the details of the order and puts it in a queue for sending it to the exchange. Then, the exchange verifies the particulars of the order and accepts the order if there are no errors. You can also modify your online order to buy or sell the shares once your original order is accepted by the exchange but not executed so far. Once the order is executed you cannot make any changes to your order.
Another thing to keep in mind is the disclosed quantity feature:
Disclosed Quantity- This feature allows a market participant to disclose to the public only a part of the total quantity he/she intends to purchase/sell. Supposedly, Mr. X wants to buy 5,000 shares of ABC Corporation Ltd. Assuming that the stock is illiquid, such an order can significantly alter the market price of the stock. Instead, Mr. X can simply place 1,000 in the disclosed quantity column to execute the order at a limit price of say ₹102. It is only after the first order has been executed, the screen will show a pending order for another 1,000 shares and so on till the entire order has been executed.