Types of Orders

The world of trading is a vast and varied landscape, with individuals choosing diverse strategies and approaches. From short-term speculators to long-term investors, each trader has a unique style that aligns with their risk tolerance, investment goals, and time commitment.

What is a Trade Orders?

Your trade orders are your instructions to the market, dictating how and when your trades are executed. In this comprehensive guide, let's explore the various types of orders and analyse their key features.  

Think of it ordering a Burger.You inform the Burger place what kind of burger you want and how much you are price to pay for it. If the fee is you agree, they will make your Burger. If its costly you decline order, they may not.

Similarly, when you place a trade order, you're telling the stock market what you need and what kind of you're willing to pay or sell for. If the market agrees for your trade, your change could be exicuted.

Types of Orders in Trading

Regardless of whether the trade results in a profit or loss, the broker executes your trades precisely according to the trade order. So, creating the perfect trade order that maximises your profit and minimises your losses is crucial for every type of trader. Let's examine the most common types of trade orders.

1. Market Order

The Market order is one of the most straightforward order types, where you buy or sell stock immediately at the best available price in the market. Choose a market order when you want to immediately execute the trade and think the stock is priced just right.

Market orders are executed immediately when the market is open. If you place a market order after the market is closed, it will be executed when it opens next.

Example - You want to buy 100 shares of Company XYZ, currently trading around ₹250. You place a market order. The order executes immediately at the best available price, which could be ₹249.50 or ₹250.10, depending on current market conditions.

2. Limit Order

The Limit order lets you buy or sell a stock with restrictions on the maximum price to be paid for a buy limit or the minimum price to be received on a sell limit.

Choose a limit order when you think you can buy at a price lower than or sell at a price higher than the current price. Limit orders are ideal for traders and investors who are patient and willing to wait for the right opportunity. However, there might be missed opportunities when there are sudden price fluctuations, and the broker has a backlog of orders to be filled before yours.

Example: You want to buy shares of Company XYZ, currently trading at ₹150. You set a limit order to buy at ₹145. The order will only be executed if the price falls to ₹145 or lower. If the price never reaches ₹145, the order will not be placed.

3. Stop-Loss Order

The Stop-loss order instructs the broker to buy or sell a stock at the current market price once the stock price has reached the specified stop price. When this occurs, and the current market price of stock matches the specified stop price, the order is converted into a live market order and executed immediately. The order will never be executed during the trading horizon if the stock does not reach the stop price.

A sell-stop order is helpful to minimise loss or protect unrealised gains. You can use it with the stop price below the current market price, as the order will be triggered when the stock drops to the stop price. A buy-stop order can be set up with a stop price slightly above the current market price. It allows you to buy the stock quickly when it reaches the stop price.

Example: You own shares of Company  XYZ, currently priced at ₹300. You set a sell-stop order at ₹290. If the price drops to ₹290, the order converts to a market order and sells the shares, potentially at ₹289.80 or ₹290.20, depending on market conditions.

4. Trailing Stop Loss Order

A variation of a stop loss order, a Trailing stop loss order adjusts the price based on the current market price. The stop price will trail behind the market price by a specified percentage or amount, and you can gain profits as the price moves in your favour. Trailing stop-loss orders may not be as effective for highly volatile stocks.

When a stock has steadily increased in value, a trailing stop loss order at a specific percentage below the current market price can help you lock in profits. However, when the market becomes highly volatile, this order may be triggered prematurely, resulting in a loss.

Example: You buy shares of Company XYZ  at ₹200 and set a trailing stop-loss with a 10% trail. If the stock price rises to ₹220, the stop price adjusts to ₹198 (₹220 - 10%). If the stock then falls to ₹198, the order triggers and sells at the current market price.

5. Stop-Limit Order

The Stop limit order combines both the limit order and the stop order. It is triggered when the market price reaches a specified stop price, at which point it becomes a limit order with a specified limit price. It offers more control over the order as it will be executed only if the market price reaches the limit price after the stop price is triggered. It can be helpful to limit potential losses while also providing some control over the execution price.

You can use a stop limit order if you are holding a stock that has been declining and you are concerned about further losses. A stop limit order with a stop price slightly below the current market price and a limit price slightly above the stop price can benefit you. This way, if the stock continues to fall and reaches the stop price, your order will become a limit order, ensuring that you don't sell at a significantly lower price than your desired limit.

Example: You hold shares of Company  XYZ, trading at ₹400. You set a stop-limit order with a stop price of ₹380 and a limit price of ₹375. If the stock drops to ₹380, the order becomes a limit order to sell at ₹375 or better. If the price falls below ₹375, the order will not execute.

6. All or None (AON) Order

Those who want to trade penny stocks can benefit from All or None orders. This order is executed so that you get either the entire quantity of shares or none at all. Those who use a hedging strategy may need an AON order.

If you put an all or none order to buy 2000 shares of a company and only 1000 shares are available, then your order will not be executed until at least 2000 shares are available at the specified price. If you had placed an order without all or none restrictions, then your order would have been filled partially with 1000 shares.

Example: You want to buy 1,000 shares of Company  XYZ at ₹50. If only 500 shares are available at that price, the order won’t execute. It will only be filled if 1,000 shares can be purchased at ₹50.

7. Immediate or Cancel (IOC)

Immediate Or Cancel order is useful when your trading horizon is very short. IOC orders will be executed in a concise period of just a few seconds. The order will be filled only when the shares are available at the immediate interval. Otherwise, the order will be cancelled altogether. IOC orders ensure that the order is executed as quickly as possible, even if it means only a portion of the order is filled.

Example: You place an IOC order to buy 500 shares of Company  XYZ at ₹60. If only 300 shares are available at ₹60, the order will buy those 300 shares and cancel the remaining 200 shares of the order.

Below is a quick overview of the pros and cons of each type of order:

Conclusion

Traders hoping to make profits in the stock market must understand the various types of orders in trading. You must choose the order type based on whether you need fast execution, precise price control, or both. Your individual trading strategy must determine the type of order applicable to that trade.

Experienced traders often combine market and limit orders with other orders to achieve their investment goals and manage risk effectively. Remember, not all stock brokers offer all the different types of orders. Explore the options available in your trading platform and choose the one that best fits your trading goals.
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