What are The Two Major Types of Orders That Every Investor Should Know?

What are The Two Major Types of Orders That Every Investor Should Know

In the context of the stock market, an order is the instruction that the investor gives to a broker to buy or sell stocks. When it comes to buying and selling, there are a variety of order types to consider. Of course, each of these methods has a distinct purpose.

Each trade is made up of individual orders that are combined to produce a complete trade. There are at least two orders, with one party placing a purchase order and the other placing a sell order on the same security. Let us understand orders in more detail.

What is a Stock Order?

An order is simply an instruction or command given by a trader or investor to a stockbroker or automated trading software to purchase or sell stocks. Depending on the different stock order types, these instructions may vary accordingly.

A single order is either a sales order or a purchase order and must be specified, regardless of the type of order being placed.

If you enter a trade with a purchase order, you must exit it with a sale order and vice versa. For example, a common trade is when you expect a stock price to rise. You can place a buy order to set foot in a trade and then place a sell order to exit that trade.

When you place a stock order to execute, it results in the trade. A trade is merely the act of placing and executing a purchase or sell order.

Purchases are made when the market price is projected to rise, while sales are made when the market price is predicted to decline. That is, if the stock price rises between these two orders, you will make a profit by selling. Conversely, if you expect the stock price to fall, you can place a sell order to enter a trade and a buy order to exit. Typically, this is known as a stock or shorting. This means that the stock is sold first and bought later.

Let us now explore the types of stock market orders.

The two major types of stock market orders are market order and limit order. Let us delve into their details.

1- Market order

Market orders aid the buying and selling of shares at a price determined by the market, known as the current bid. The order is carried out right away, as soon as you place it. A market order’s most essential aspect is that it ensures the order’s execution. The price at which the order will be fulfilled, however, cannot be guaranteed.

Consider you want to buy a stock at the current market price using a market order. Your request will be fulfilled right away. However, there’s no guarantee that the security will be purchased at the rate that you asked for. This is because the prices change every second. This is due to the market’s volatile character. Given that stock prices fluctuate a lot, the price of the stock may have changed significantly by the time the order is placed. If the stock you’re buying is a well-traded or “liquid” stock, though, you’ll get a price that’s closer to your offer price.

2- Limit order

A limit order permits you to buy or sell a security at a specific price. A purchase limit order indicates that you are willing to purchase a security at a particular price or below. A sell limit order indicates that you want to sell the security at or over the limit price. However, unlike market orders, there is no certainty that this order will be executed.

For example, if you place a buy limit order for a stock at Rs. 500, it suggests you are willing to buy the stock for that price or less. A sell limit order for a stock at Rs. 500 indicates that you want to sell the shares at that price or higher.

The best thing is that you won’t have to track the stock market movement every second in order to receive the best price as per your requirement. Thus, to some extent, the limit order automates your trade. Orders can be placed for a day, a few weeks, or even over a month.

Let us summarise by differentiating between these two orders.

Apart from this, there are other types of orders that can be placed in the stock market. These include:

  • Stop-Loss Order- This order is intended to help limit your losses on stocks by specifying the price at which you will sell your stock. If the market price of the share falls to that level, your order will be executed, and the stock will be sold.
    For example, assume you own 100 shares of a particular company, each worth Rs. 50. The current price per share is Rs. 58. Definitely, you would want your stocks to continue to rise. As a result, you keep the shares but sell them if the price drops below Rs. 55, allowing some margin between your purchase and selling price. This can be done by placing a stop-loss order at Rs. 55.
  • Cover Order- This is an intraday order that is associated with a stop loss order. This aids traders in limiting their losses by protecting them against unanticipated market changes. Cover orders are accessible in the equity cash, equity F&O, commodity F&O, and currency F&O market segments and offer substantial leverage.
  • Bracket Order- You can combine three orders into one using a bracket order. This indicates that in addition to the primary order, two opposite side orders will be placed. This works for both buying and selling.
  • Good Till Cancelled (GTC) Order- When you want a deal to be executed at a specified rate for an apt quantity, a GTC order is used to place a buy/sell order. Once a GTC order is placed, it is valid until it is executed or revoked. However, most brokers require the investor to set a time limit on how long GTC orders can be held open.
  • Trailing Stop-Loss Order.- A trailing stop loss is a day-trading order that allows you to specify a maximum loss amount or percentage on a trade that you are willing to undertake. The stop will remain in place if the price of the security rises or falls against you.

When your money is at stake, placing the wrong order can lead to a slew of issues. Practice is the greatest method to become familiar with various order types. For advice from trusted experts, reach out to us on the Teji Mandi website.

Let us now see how you can execute these orders.

How are orders executed?

When you send information to your broker to buy a stock, the broker would want to know if you have enough money to acquire the shares or not before passing the order on to the exchange.

On confirmation, your order ticket will be sent to the stock market. Once the order reaches the stock market, using the order matching tools, a seller prepared to sell you the number of shares at that price will be identified. There may be more than one seller ready to make the trade. However, that is not relevant. The only thing that matters is that your order will be complete. Once the deal is done, all these shares will be electronically credited to your Demat account and will be deducted from the seller’s Demat account.

Are you new to stock investing and wish to know the very basics? Here is a guide on how to invest in stocks in 6 steps on the Teji Mandi blog.

Conclusion

Trade transactions are influenced by a variety of circumstances. Traders can set up various parameters that influence the terms of an order in terms of its time in effect, volume, or price limits. Before placing your trade, familiarise yourself with the many methods by which you can manage your order. This way, you’ll be far more likely to get the result you want.

The experts at Teji Mandi help you with all your investment requirements, including active portfolio management, helping you reach your financial goals. Reach out to us on our website to dip your hands in the stock market today!

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