Knowledge Base

5 order types to know about in stock market trading


in Basics of trading

Stock market trading is all about buying and selling shares. To do this, you have to place orders with your broker. This is actually very simple. All you have to do is mention the details of the stock, order quantity and select one of the order types. The last part can be a bit confusing. Yet, it is equally important.

Let’s cover the five major order types.

  1. Market order:This is the most basic of all order types. In a market order, your order will be processed immediately at the latest price. Traders prefer market order if the aim is to acquire or sell the stocks as soon as possible without waiting for the market price to reach a certain level. The idea is to save time, not get the right price. In a market order, you could end up paying more than you want to.
  2. Limit order: In the stock market, timing is very important so that you get the lowest possible price while buying shares. This is where a limit order comes handy. In a limit order, you specify the price at which you want to buy the shares. Until the market price falls to that level, the order will not be processed. For example, suppose you want to buy 100 shares of Reliance at Rs 920, but the stock is trading at Rs 950. Instead of regularly monitoring the shares, you can simply place a limit order. It will get processed as soon as the price falls to Rs 920 or lower. While giving a limit order, you can specify if the order expires the same day or after a certain period of time.
  3. Stop-loss order: A stop-loss order helps you set a lower limit for your shares. You essentially specify the price at the stocks get sold. Once the market price hits this level, the shares will be sold. This helps limit your losses and acts as a safety net.In the previous example, you bought your RIL stocks at Rs 920. Suppose, the price has gone back to Rs 950 levels, but you worry it will fall again. You can then place a stop-loss order at Rs 930 or lower. This ensures you are not at a loss.
  4. Cover order: This is a more specialized type of order. It is mainly applicable for intraday traders, who use margins and leverage. As part of a cover order, you place two orders simultaneously – a market buy order and a stop-loss (sell) order. This helps lower risks of loss. If the price does not fall down, then the stop-loss order never gets executed.
  5. Bracket order: While a cover order is a two-legged order, a bracket order contains three separate orders – a basic limit order, a stop-loss order at a lower price, and a profit-objective or profit-booking order. It helps sell shares automatically at a high price to book your profits. So, like a bracket, it involves a lower and an upper limit. So all your trades will be conducted in a price range. If the share price goes up and hits your upper price limit, your profit-booking order will be executed while the stop-loss order gets cancelled. However, if the price falls, the stop- loss order acts as a safety net. Thus, a bracket order helps you to automatically book profits or limit losses on any position. As a result, it helps reduce your risks.