What are the different types of orders in the stock market?
The stock market and financial service business have seen immense change post digitalisation or technological advancement. Gone are the days of a crowded trading floor filled with roaring and hand-waving. Now, the trading is done by fast computers that know the ins & outs of the stock exchange. Investors can buy and sell stocks right from the comfort of their home or office by placing orders either online or through a broker on a phone call.
In this article, we will go through the different types of stock orders that you can place while purchasing or selling stocks in the stock market.
Limit order: A limit order is for buying or selling the shares at a specific price only. This order will not purchase the stock in question at a price below or above the specified price. However, there is no guarantee that the trade will be executed in the limit order. For example, suppose, you want to purchase a share at Rs 100 and the market price of that security is Rs 105. You can place a limit order for the same in this case. The purchase order will be executed only when the current market price touches Rs 100; otherwise, the execution of the order will not take place and it will stand cancelled by the end of the day.
Market order: A market order is different from a limit order in the sense that the investor does not get to enter a specific price to buy or sell a share but instead, buys or sells at the current market levels. The benefit of a market order is that it will get executed immediately at the current price of the stock. For example, if you want to purchase a share and its current market price is Rs 20, the purchase order will be executed at Rs 20 immediately.
Stop-loss order: Stop-loss orders are one of the most important types of orders, especially for intraday traders. It is an order to buy or sell a stock and exit a position when the stock price reaches a particular value. And once the price is reached, the stop-loss order becomes a market or limit order and the order is executed. A stop-loss is quite useful if an investor does not have time to constantly monitor the price of his investment. For example, if an investor buys a stock at a price of Rs 40 and knows that they might face a big loss if the price falls below Rs 35, they can set a stop-loss order at this price to sell the stock once it reaches this level.
Cover order: Cover order is an order with an in-built risk mitigation mechanism. Simply put, it is two orders bundled together into one - a market order/limit order and a stop-loss order. Hence, the maximum loss that an investor will bear is known in advance if the trade moves against the investor. Considering that the stop-loss order is being placed at the same time while getting into the contract, the risk automatically reduces particularly, if the stock is volatile.
Bracket order: A bracket order combines the benefits of multiple orders placed simultaneously and allows the investor to fully automate the purchase or sale in a given security. It essentially involves three sets of individual orders, which are a buy/sell, stop-loss, and a target order. This allows for automatic profit booking as well as automatic covering of losses if the trade goes against the investor. For example, suppose, an investor wishes to buy the shares of ABC at Rs 1,000 and wants to book profits at Rs 1,050. However, he wants to set a stop-loss at Rs 990 if the trade goes against him. With the normal orders, he would have to place a buy order with a limit price of Rs 1,000, a sell order at Rs 1,050, and a stop-loss order at Rs 990. After putting the above orders, he would have to constantly monitor the trades to ensure that if any of the orders get triggered, the others are cancelled immediately or else, there is a possibility that all of the three orders get executed as separate transactions. Thus, with a bracket order, a lot of time and hassle is reduced.