Types of Orders: Different Order Types in Stock Market

You’re scrolling through your phone with your friends at a coffee shop, catching up on the latest news. Suddenly, you see a headline about a tech company’s stock price skyrocketing overnight. Your friends, who are into investing, start excitedly discussing how some people must have made a fortune.  

Intrigued, you pull up the company’s stock information. The price keeps climbing, and you’re tempted to jump in and buy some shares. But with all this sudden movement, you’re unsure what type of order to place to get the best deal.  This sudden surge has you wondering about market orders, limit orders, and how they might affect your potential windfall. 

There are two possibilities for you; one is a market order, while another is a limit order. But hold on, there are other types of orders in stock trading besides these. We will help you understand the types of orders in trading and how different types of orders work in stock trading.

Types of Orders

Below are the types of orders you should know about:

Market Orders

Market orders, the most basic type of stock trading request in India, allow traders and investors to purchase or sell a security at the prevailing market price, enabling instant execution. However, despite their convenience, market orders do not ensure fixed prices during purchase or sale, resulting in slippage characterised by market conditions. This happens when the actual execution price of a trade differs from the predicted price, which is often affected by current market conditions.

Market orders are the simplest way to buy and sell stocks. They instruct your broker to fulfil your order as soon as possible at the current market price. This is ideal for situations where getting in or out of a trade quickly is your main priority, even if it means paying a slightly higher or lower price than the last traded price.

Limit Orders

These orders provide fixed-price options for individuals, but there’s no guarantee of immediate execution. Limit orders are designed to give both traders and investors a say in their purchases or sales. They specify the highest price investors may pay and the lowest price they can sell their assets. Even with limit orders, there’s a chance you might not get the exact price you wanted. This is called slippage. Imagine you set a limit order to buy a stock at ₹100. If the stock price suddenly jumps to ₹102 before your order gets filled, you might end up paying a bit more than ₹100 per share.

Limit orders cater to investors and traders who want to determine at what prices they will purchase or sell stocks. Limit orders can help traders avoid losing money by allowing them to buy into or sell out of positions at specific prices. They also apply to trading volatile and illiquid securities whose rates can oscillate widely.

Stop Loss Orders

Stop-loss orders are important tools in managing risks. They automatically sell a stock once it reaches a predetermined price level, avoiding further losses. However, if market movement is rapid, stop-loss orders may result in slippage.

They can be used by day traders who want to reduce the risks involved with their trades and avoid open-ended losses. However, this stock order type cannot guarantee its action because the market price may gap over or jump through the stop price due to strong volatility or insufficient liquidity. This results in the difference between the entered value and the executed price being equal to zero since it was untraded on the exchange.

Stop Limit Orders

Stop-limit orders are a combination of stop-loss and limit orders. They are instructions to buy or sell a stock at a specific price (or better) but only when the market price reaches or surpasses a predetermined price, known as the stop price. There are two key prices involved:

• Stop Price: this triggers the order to become a market order
• Limit Price: this is the desired price at which the order will be executed, at or better than the stop price

Stop-limit orders are ideal for traders or investors who want more control over the execution price of their trades. They can help avoid slippage by entering or exiting positions at favorable stop prices. However, while they ensure an attempt to get the desired price, they don’t guarantee execution. There’s still a chance of missing opportunities if market conditions don’t meet the set parameters.

Trailing Stop Orders

Trailing stop orders automatically adjust the stop price as markets move, allowing traders to capture profits while protecting against losses. However, they may not execute under extremely volatile conditions.

Trailing stops are a valuable tool for traders aiming to increase profits and reduce risks. They enable traders to enter trades that could take advantage of a trend while automatically exiting losing trades at predetermined levels. Trailing stop orders can be beneficial in various market conditions, but their effectiveness depends on the specific trading strategy.

While regular monitoring isn’t mandatory, it can be helpful to reassess and potentially deactivate trailing stops when nearing a desired profit target or when deciding to close a trade.

Conclusion

In conclusion, understanding different order types empowers traders to execute their strategies effectively. Market orders prioritize speed, while limit orders prioritize price control. Stop-loss orders manage risk, and trailing stops offer dynamic protection. Choosing the right order depends on factors like market volatility, risk tolerance, and desired execution price.

FAQs