With the advent of the internet and digital technology, investors are now opting to buy or sell stock online instead of paying huge fees to the financial advisors to execute trades on behalf of them. But before you start buying or selling stocks online, you should know the different types of orders and when each of them can be used. The term “order” in stock trading means an instruction to buy or sell Securities on any trading venue like stock/ commodity/ bond/ derivatives/or even in a cryptocurrency market.
When an investor places an order to buy or sell a stock, two fundamental trade executions happen. One is called the “Market Orders” which is placing the order quickly at the current market price, and the second is the “Limit Orders” which set the extent of the maximum or the minimum price at which investors are willing to buy or sell the securities.
Market Order is that type of an order where an investor is willing to buy or sell a stock immediately at the current available price. It guarantees the investors as to the surety of the order execution but cannot guarantee them the execution price. It is generally executed at or near the current bid price in case of a sell order or ask price in case of a buy order. However, it is not always the last-traded price at which the next Market Order will be executed.
While placing a Market Order one needs to specify the accurate quantities of stocks that he is willing to buy or sell. In a Market Order, through execution of the order is guaranteed, prices at which the stocks are bought and sold may vary.
Limit Orders participants can buy or sell a security at a specific price or a better price. More specifically, a buy Limit Price Order can be executed at a lower price, whereas the sell Limit Price Order can be executed at a higher price.
Therefore, the difference of a Market order from a Limit Order lies in the fact that a Market Order is executed at the current available price while a Limit Order gets executed at a specific price. Another difference is that in the former’s case, the investors can buy or sell stocks at any desired quantities, but the price may shoot up or go down anytime, which poses the investors at high risks; stock price fluctuates now and then. Whereas, in the case of a Limit Order though the investors can only buy or sell a fewer number of shares, they can do them at their desired prices, which is an excellent advantage for the participants of a Limit Order.
Apart from these, there are more orders that the stock market investors often come across. They are Stop Loss Order and other complex orders like Cover Orders. A Stop Order can be both Market Orders or Limit Orders. A Stop Loss Order implies an order that is placed by the investors for selling a stock only when it reaches a certain price. It is primarily meant to limit the investors’ loss on a stock that he has already purchased before. The price that is mentioned on the Stop-Loss Order is the highest risk that the investor is willing to take up as a loss on that stock.
The stop loss Limit Order is an order to buy or sell securities at the price when it reaches the specified range; the price is called the “stop price.” As soon as this Stop price is reached, the stop order becomes a Market Order. It is an order that is to be executed at the price that the participants want them to be executed. A Stop Price Limit Order acts as a trigger to validate the orders placed. In the case of a Buy- Stop Loss Limit Order, the Trigger Price is less than the Limit Price and vice versa for a Sell-Stop Loss Limit Order.
The Stop-Loss Market Order is said to have been executed when as soon as a trader triggers the Stop Loss, the order will be placed at whatever price prevalent in the market at that time.
Therefore, in the case of a Stop Loss Market Order, the trigger price must be mentioned. Once the participants hit the trigger price, the order immediately becomes a Market Order and is sent to the exchange. A Stop Loss Market Order is said to have been executed when the stop price goes above the current price available in the market. Investors generally use this Stop Loss Market Order to protect the profit on particular security that it had sold short or to limit a loss.
Cover Orders are complex orders that are the combination of the Market Order and the Stop Loss Market Order. In these types of orders, the first order that is to be executed is always a Market order and the second one is the Stop Loss Market Order that cannot be canceled in any way. But the order can be modified up to the last traded price (LTP).
AMO or After Market Orders or AMOs are special order types meant for busy participants. Busy participants who cannot place orders during the working hours can place “After Market orders” at their leisure. They can take time researching the markets before the market opens, and then order to buy or sell securities after the market closes. The AMO timing for the Cash and Currency segment is 6.30 pm to 12.00 am, and 4.00 am to 9.00 am. For the MCX segment, the timing is 4.00 am to 9.45 am.
Most of the trades nowadays are executed through online brokers who place trades on behalf of the investors. While placing a trade, the trader has to decide the order type he is willing to execute. In the case of online brokers, investors are given the option to choose from the various order types from the order screen. If the investor chooses no order to buy, the screen will take Market Order as the default order type. Therefore, it is very important that the investors double click and select their preferred order type before placing an order.
When a participant places an order for buying or selling a stock, that goes into the inbuilt processing system on the order screen that chronologically places orders. The stock markets are now completely automated and run by computers that do all the orders received following distinctive rules. If a participant is willing to place an order and get it processed as quickly as possible by taking whatever price available at a given time, then he can enter his transactions as Market Orders. He can place an order of any quantity as he wishes but the price cannot be changed.
Market orders are processed at first even before any pending orders (provided they are of other order types). If any Market Orders were placed before your orders, they would be executed first, and each execution will affect the scrip price. The more numbers are pending to be processed before yours, the more is the risk of the stock prices to change dramatically.
Market orders aren’t the ones that are most preferred by the investors owing to its high risks associated with the price changes of the orders placed. But there are times when placing a Market Order seems to be the most fruitful option. Like in times when the stock market is moving against you, you can bail out from the situation quickly by using Market Orders. For that, you don’t need to worry about slippage; you should sell out your holdings as fast as you can because holding them for longer will attach more risks.
Though a Market Order involves controlling the entry and the exit prices but there are times when an investor becomes more concerned about buying or selling the stock as quickly as they can at whatever price available in the market during that time. During these trying times waiting for the hot stock may cost you more than quickly adjusting to the market changes and buying or selling a stock at whatever price is available.
In the case of a Market Order, numerous orders can be placed at the current market price that is available at that time. Whereas in the case when investors buy limit order, only a few can be placed but at the desired price that the traders want them to be. Whenever a market order is placed, there always lies a threat of market fluctuations occurring between the time the broker receives the order and the time the trade is executed.
A Stop Order is said to be in action when a security price exceeds the current market bid. A Stop Order becomes active after a specific level of security price has been reached. A Buy Stop Order is placed above the stock’s current market price, and a Sell Stop Order is placed below the market price. It is just opposite to what a Buy Limit order is.
There always lies a threat of market fluctuations, occurring between the time at which the broker receives the order and the time at which he can execute the trade.
It either means placing Market or Limit Orders.