Rapid digitisation has now made it very easy for anyone to begin trading in the stock market. In today’s internet era, one can trade in stocks online from the comfort of one’s home and with the click of a button. It is just like online shopping, where an individual can place an order to buy or sell stocks. That is known as ‘order’ in stock market terms.
An order is essentially an instruction given by the investor or trader to his/her broker or broking platform. This is used for executing, buying and selling of stocks. In stock markets, there are different types of orders that can be executed depending on one’s preference.
Here, we will discuss the concept of ‘Orders’ in stock markets and the different types of orders that investors or traders should know about.
What is an order?
In stock markets, an order is an instruction given by an investor to a stockbroker for buying or selling stocks on the market. An investor or trader can make use of different order types in the stock market. Depending on the order type, the broker or broking platform with initiate the trade on behalf of the investor.
Types of orders in stock markets
Listed here are some of the most commonly used order types in Indian stock markets:
A market order can be placed by an investor when he/she wants to buy or sell a security at market prices. Such orders have immediate execution since the price used is the latest market price. Although the price at which the order will be executed is not guaranteed, an investor can expect a guarantee of order execution in this category.
Suppose the current market price of a stock ABC is Rs. 100. If an investor places a market order to invest in this stock, it will be executed immediately. However, there’s no guarantee that the stock will be bought at the ‘ask’ price of Rs. 100.
The reason behind the possibility of price differential is due to constant market volatility that results in prices fluctuations every second. By the time an investor places a market order, the last-traded price of the stock may have already changed. However, an investor still gets to execute a trade at a price that is somewhat closer to the bid or ask price. This also depends on how liquid the stock is.
A limit order allows investors to place an order for buying or selling a stock at the price he/she wants. A buy limit order means that the investor is willing to buy security only at a specific price or lower and a sell limit order means he/she wishes to sell the security at a certain price or higher. Unlike market orders, after placing a limit order, there is no guarantee that it will get executed.
Suppose an investor places a buy limit order for a stock at a price of Rs. 100. This means that the investor is willing to buy the stock only at Rs. 100 or lower. If he/she places a sell limit order for a stock at Rs. 100, it means that he/she is willing to the stock only at a price of Rs. 100 or more.
This type of order allows investors to ensure that they don’t follow price trends of stocks and can aim for the right price. A limit order can also help in automating trades to a certain extent. These types of orders, once placed, can last for a trading day, a few weeks, or even a month.
This type of order for buying or selling a stock is executed only once the stock price reaches a stated price. Such stock price or value is called the ‘stop price’. Until the stock price reaches the stated price, this type of order will remain dormant. Only once the stock price is achieved, the stop order converts into a market order or limit order and gets executed.
This order type is also known as a stop-loss order. It is very useful for investors or traders who lack the required time to constantly track and accordingly execute trades during a trading day.
Suppose an investor comes to know that he/she may likely suffer a huge loss if a stock’s price falls below Rs. 50. Since he/she cannot constantly track the stock price, he/she can use a stop order to sell the stock as soon as its price reaches this level. Thus, the investor can avoid a significant loss.
This order type acts as a combination of a market order and a stop-loss order. A buy or sell order, in this case, is always a market order. If an investor would like to specify a Stop-Loss Trigger Price (STLP) and the limit price, he/she can minimise the risk exposure through this type of order. Since a cover order involves the use of leverage, the SLTP must be within defined price ranges that depend on the stock and the broker. A cover order helps in minimising losses.
Margin Intraday Square Off Order (MIS)
Under this intraday order type, each order must be squared off within a given trading day. Here, if the order is not closed before 3:00 PM on a given trading day, the trade is automatically squared off or closed. This is mainly useful for traders who want to benefit from intraday market fluctuations.
It allows much higher leverage as each trade is squared off within the trading day. Leverage means the amount of money one can borrow for trading. In these types of orders, one can pay only a portion of the total amount that is required for trading, as the broker pays the balance.
Bracket Order (BO)
Bracket order features the benefits of different orders that are simultaneously placed. This allows investors to completely automate any buy or sell transaction.
It primarily involves 3 parts or individual orders. This includes placing a buy or sell order, the target order, and the corresponding stop-loss order. Thus, an investor can place a fully covered order on the exchange that ensures automatic booking of profits and automatic covering of losses.
An important point to note in Bracket orders is that it involves a time period that is restricted to a single trading day and investors cannot access it for a longer time horizon.
It is important that investors know about the different orders types in the stock market along with the unique features that these offer. This will help investors choose the right order type for maximising profits while dealing in the stock market.
Since stock trading involves high levels of risk, sufficient knowledge about the order types will help investors decide the right order that will suit their objective. This can help in minimizing losses and achieving the target price.
To trade in the stock markets, you must have a Demat and trading account with a registered broker or broking platform. It is also important to have the requisite knowledge about the stock markets before trading.
To open a Demat account, you can download the Fisdom app on your smartphone. The app has a seamless KYC and account opening process that can be completed online.
Yes, by using the ‘after-hours trading’ mechanism, you can place a buy or sell order after trading hours in the stock markets. The Securities and Exchanges Board of India (SEBI) allows traders to trade outside of regular trading hours using this tool.
Many order types in stock markets allow you to customise the quantity and price point preference while buying or selling stocks.
IOC is Immediate or Cancelled allows investors to buy or sell a stock as soon as the order is placed. Since this is a duration order, if it does not get executed immediately, then the order is removed from the system.