What Is an Order?
An order is an instruction given to a broker or brokerage firm to buy or sell a security for an investor. It's the basic way to trade in the stock market. Orders can be placed by phone, online, or through automated systems and algorithms. Once an order is placed, it goes through a process to be completed.
There are different types of orders, allowing investors to set conditions like the price at which they want the trade to happen or how long the order should stay active. These conditions can also determine whether an order is triggered or cancelled based on another order.
Types of Orders
Market Order
A market order is an instruction to buy or sell a stock at the current price available in the market. With a market order, the investor doesn't control the exact price they pay or receive—the market decides the price. In a fast-moving market, the price can change quickly, so you might end up paying more or receiving less than expected.
For example, if an investor wants to buy 100 shares of a stock, they will get those 100 shares at whatever the current asking price is at that moment. If the price is ₹500 per share, they’ll buy 100 shares for ₹500 each. However, if the price changes before the order is executed, they might pay a different amount.
Limit Order
A limit order is an instruction to buy or sell a stock at a specific price or better. This allows investors to avoid buying or selling at a price they don't want. If the market price doesn't match the price set in the limit order, the trade won't happen. There are two types of limit orders: a buy limit order and a sell limit order.
Buy Limit Order:
A buy limit order is placed by a buyer, specifying the maximum price they are willing to pay. For example, if a stock is currently priced at ₹900, and an investor sets a buy limit order for ₹850, the order will only go through if the stock price drops to ₹850 or low
Sell Limit Order:
A sell limit order is placed by a seller, specifying the minimum price they are willing to accept. For example, if a stock is currently priced at ₹900, and an investor sets a sell limit order for ₹950, the order will only go through if the stock price rises to ₹950 or higher.
Stop Order
A stop order, also known as a stop-loss order, is a trade order that helps protect an investor from losing too much money on a stock. It automatically sells the stock when its price drops to a certain level. While stop orders are commonly used to protect a long position (where the investor owns the stock), they can also be used with a short position (where the investor has sold a stock they don't own yet). In that case, the stock would be bought if its price rises above a certain level.
Example for a Long Position:
Imagine an investor owns a stock currently priced at ₹1,000. They're worried the price might drop, so they place a stop order at ₹800. If the stock price falls to ₹800, the stop order will trigger, and the stock will be sold. However, the stock might not sell exactly at ₹800—it could be sold for less if the price is dropping quickly.
Example for a Short Position:
If an investor has shorted a stock at ₹1,000 and doesn't want to lose too much if the price rises, they might set a stop order at ₹1,200. If the price goes up to ₹1,200, the stop order will trigger, and the investor will buy the stock at that price (or higher if the price is rising quickly) to cover their short position.
To avoid selling at a much lower price than expected, investors can use a stop-limit order, which sets both a stop price and a minimum price at which the order can be executed.
Stop-limit order
A stop-limit order is a trade order that combines features of both a stop order and a limit order. It involves setting two prices: the stop price and the limit price. When the stock reaches the stop price, the order becomes a limit order. This means the stock will only be sold if it can meet or exceed the limit price, giving the investor more control over the selling price.
Example:
Let's say an investor owns a stock currently priced at ₹2,500. They want to sell the stock if the price drops below ₹2,000, but they don't want to sell it for less than ₹1,900. To do this, the investor sets a stop-limit order with a stop price of ₹2,000 and a limit price of ₹1,900.
If the stock price falls to ₹2,000, the stop order triggers, but the stock will only be sold if it can get at least ₹1,900 per share. If the price drops too quickly and falls below ₹1,900 before the order can be executed, the stock won’t be sold until it reaches ₹1,900 or higher.
In contrast, a regular stop order would sell the stock as soon as it hits ₹2,000, even if the price continues to fall rapidly and ends up selling for less. The stop-limit order gives the investor more control over the price, but there’s a chance the stock won’t sell if the limit price isn’t met.
Trailing stop order
A trailing stop order is a type of stop order that adjusts automatically based on the stock's price movement. Instead of setting a specific price, the trailing stop is based on a percentage change from the stock's highest price. This helps protect profits while allowing the stock to rise in value. If the stock's price falls by the set percentage, the order is triggered and the stock is sold.
Example for a Long Position:
Imagine an investor buys a stock at ₹1,000 and sets a trailing stop order with a 20% trail. If the stock price goes up to ₹1,200, the trailing stop will automatically move up to ₹960 (20% below ₹1,200). If the stock price then drops to ₹960 or lower, the trailing stop order will trigger, and the stock will be sold.
Example for a Short Position:
If an investor has shorted a stock at ₹1,000 and sets a trailing stop of 10%, the stop price would move down as the stock price falls. If the stock price rises by 10% from its lowest point, the trailing stop order will trigger, and the stock will be bought to cover the short position.
The trailing stop order allows the investor to lock in gains as the stock price moves favorably, while still providing protection if the market turns.
Immediate or Cancel (IOC) order
An Immediate or Cancel (IOC) order is a type of stock order that must be executed immediately. If the full order cannot be filled right away, whatever portion can be filled will be completed, and the rest will be canceled. If no part of the order can be executed immediately, the entire order is canceled.
Example:
Suppose an investor places an IOC order to buy 500 shares of a stock at ₹1,000 per share. If only 300 shares are available at ₹1,000 right away, the IOC order will purchase those 300 shares, and the remaining 200 shares will be canceled. If no shares are available at ₹1,000 immediately, the entire order will be canceled.
Good Till Cancelled (GTC) order
A Good Till Cancelled (GTC) order is a type of stock order that stays active until you choose to cancel it. Unlike other orders that expire at the end of the trading day, a GTC order remains open until you either cancel it or it gets executed. However, most brokerages set a limit on how long you can keep a GTC order open, usually up to 90 days.
Example:
Let's say an investor wants to buy a stock at ₹500, but the current price is ₹600. They place a GTC order to buy 100 shares at ₹500. This order will stay active until the stock price drops to ₹500 and the order is filled, or until the investor cancels the order. If the price never drops to ₹500 and the investor doesn't cancel the order, it will automatically expire after 90 days (or whatever time limit the brokerage sets).
Good 'Till Triggered (GTT) order
A Good 'Till Triggered (GTT) order is similar to a Good 'Til Canceled (GTC) order but with a key difference: a GTT order only becomes active when a specified trigger condition is met. Once the trigger price is reached, the order is placed in the market. If the trigger price is not reached, the order stays inactive.
Example:
Imagine an investor wants to buy a stock currently priced at ₹600, but only if it drops to ₹550. They set a GTT order with a trigger price of ₹550. If the stock price falls to ₹550, the order is activated and placed in the market. If the price never drops to ₹550, the order remains inactive until it reaches the trigger price or the investor cancels it.
GTT orders can also have a time limit, so if the trigger price isn’t reached within a certain period, the order will expire.
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