Understanding Stock Market Order Types

October 26, 2023by Supriya Kadu0

Investing in the stock market can be both exciting and challenging. If you want to make smart trades or investments, you should know about the different types of stock market orders, no matter how experienced you are.

There are many kinds of orders used in the stock market. This article will explain each one of them and give you examples to help you understand what they mean.

Understanding Stock Market Order Types

What is an Order in the Stock Market?

An order is a mandate to carry out a transaction. Usually, this command is used to purchase or sell tradable assets such as stocks, bonds, ETFs, and others. 

An investor tells a brokerage firm to buy or sell a certain amount of a security at a certain price. This is called a stock market order. In order for trades to go smoothly on the stock market, these orders are necessary.

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Key Points

  • A market order just buys or sells shares at the current price on the market until the order is met.
  • There are different types of orders that can help you trade stocks better, depending on how you like to spend.
  • A limit order establishes a price at which the purchase must be fulfilled. If the limit is set too high or too low, there is no promise that any or all of the orders will trade.
  • Stop orders are a type of market order that are activated when a stock goes above or below a certain amount. People often use them to protect themselves from bigger losses or to keep their profits.

Let us get into the stock market order types to make you understand their basis. 

Stock Market Order Types

  • Market Order

Market order is the simplest sort of trading. In this order type, you can immediately buy or sell at the current price, as it’s not necessary to mention a price when buying or selling stock in this type of order. 

The price at which a market order will be carried out in this volatile market frequently differs from the most recent traded price, sometimes known as the real-time quote. 

Example: An investor places an order to buy 500 shares of ABC Company when the offer price is Rs.100 per share. The order will be fulfilled right away at the best price on the market.

Note: Market orders do not guarantee a price, but they do promise that the order will be executed immediately.

  • Limit Order

A limit order is a form of order in which a trader specifies the exact price at which he wishes to purchase or sell shares. If the order is completed, it will only be at or near the specified limit price. There is no certainty of execution with a limit order.

A buy-limit order can only be executed at or below the limit price, whereas a sell-limit order can be performed at or above the limit price.

Example: Suppose you wish to buy 100 shares of the company XYZ, which is trading at Rs. 50 per share. You decide to put a limit order for Rs. 45 per share. Your broker will only execute the order if the stock price falls to Rs. 45 or lower. If the stock never reaches this price, your order will be held until it does or you cancel it.

Limit order has four types of order:

  1. Buy Limit: An order is placed to buy a security at the predetermined price. Limit orders must be placed on the right end of the market to guarantee that they achieve their goal of raising the price. This involves placing the order at or below the current market bid for a buy limit order.
  2.  Sell Limit: A purchase order to sell a security at or above a certain price. The order must be placed at or above the current market price to secure favorable pricing.
  3. Buy Stop: A security purchase order above the market bid at a certain price level becomes active. Instead of buy and sell limit orders, buy-stop orders are placed above and below the market. The order becomes a market or limit order immediately after reaching a stop level.
  4. Sell Stop: A sell order placed at a price lower than the current market ask. A sell stop order, like a purchase stop, becomes active only once a certain price level is reached.
  • Stop Order 

1. Stop-loss order

A stop-loss order limits the losses caused by price swings in stocks. If the stock price reaches the specified stop-loss price, an investor can limit his or her losses by leaving the deal. Stop-loss orders for buying are placed above the market price. Stop-loss orders to sell are placed below the market price.

Example: You own 50 shares of the company ABC, which is trading at Rs. 70 per share. Concerned about the possible losses, you set a stop-loss order at Rs. 60 per share.

So if the stocks fall to Rs. 60 or lower, your broker will issue a market order to sell your shares. 

2. Stop-limit order

A stop-limit order is like a mix of a limit order and a stop order. You decide what the stop price and maximum price are. When the stock price hits the stop price, a limit order is set off to buy or sell the stock at the limit price or higher.

Example: You wish to buy 100 shares of Company XYZ at the present value of Rs100, but you believe the price will fall before rising. 

You place a stop-limit order with a stop of Rs. 90 and a limit of Rs. 85. If the price falls to Rs. 90 or lower, your broker will place a limit order to purchase 100 shares at Rs. 85 or higher.

There are other stock market order types explained below:

  • After Market Order: This order type is useful for investors who want to trade after the market is closed because they are busy during market hours.
  • Cover Order: Intraday cover orders lower the possibility of limitless loss. In cover order, two orders are placed simultaneously. It includes a market order and a range-confined stop-loss order. After market order execution, stop-loss order is placed. Investors cannot cancel this stop-loss order. Stop-loss orders are automatically cancelled when intraday positions close.
  • Immediate or Cancel (IOC): When a trader sets an Immediate or Cancel order, it is either immediately executed or cancelled (if it is not performed). Time is of the essence in an IOC order. It is quite useful for traders who do not have time to monitor the markets.
  • Good Till Cancelled (GTC): A GTC order enables a trader to place a buy/sell order on a stock that remains active until fulfilled or cancelled by the trader. A trader can also provide an expiration date for the order’s validity.
  • Day Order: If you do not indicate an expiration time limit in the GTC orders, the order will typically be passed as a day order. This signifies that the order will expire at the end of the trading day. If it is not transacted (filled), you must re-enter it the next trading day.

Conclusion

To make smart financial choices, you need to know about the different Stock market order types. Each type of order is used for a distinct activity, like making trades at the current market price, setting price limits, or preventing losses. 

In order to handle their portfolios well and reach their financial goals in the stock market, investors need to use the right order types in different situations.

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Disclaimer: The sole purpose of our financial articles is to provide you with educational and informative content. The content in these articles does not intend any investment, financial, legal, tax, or any other advice. It should not be used as a substitute for professional advice or assistance.

 

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DISCLAIMER: Online Trading Institute is providing courses content and any related materials (including newsletters, blog post, videos, social media and other communications) for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments.