Share market trading involves thousands of transactions for buying selling stocks or shares on daily basis at the stock exchanges. The instructions given through the stock brokers to the stock exchanges to execute these transactions are called as stock orders. Share traders use various stock order types for buying a share or for selling shares they already hold.
Broadly speaking, a buy order is placed for buying into stocks. A sell order is placed for selling shares. However, there are different order types for buy order and sell order which gives the share traders more precise entry or exit from a trade. Either trading shares or investing in share market, it is important to enter the share market at or near our determined share prices. This reduces the losses and increases the profits for share traders.
The different stock order types under which you can place your buy order or sell order are the limit order, market order and stop order. Having knowledge of these orders helps you avoid unwanted losses while you trade equities. Moreover, they also help you in trade management when you have entered a trade.
Be it a day trading or intraday trading, cash trading or futures and options trading, knowing the stock order types is very important to a trader. What is limit order, what does limit price mean when buying stocks or selling stocks, how does a limit order work, which order to prefer out of market order or limit order – everything is important. Let us know about these order types in details!
A market order is a type of order placed to buy or sell stocks at the current market price available for any stock. This is useful when you just want to enter or exit the market quickly at whatever available price to you.
For market order, you do not have to wait for the order to get executed. It is executed as soon as you place the order.
The stock prices keep on changing every moment. So, the market order may get executed at a price different than what you saw when you placed the market order. This is because of the time taken to place the market order.
Suppose, a stock is trading at ₹ 500. You just want to buy it or want to exit it if you are already holding it with no specific price in your mind. For this, you can place a market order and the order will be executed immediately.
Market orders can be placed only when the stock market is open. You can not place market order when the stock market is shut. Furthermore, a market order can not be cancelled or modified once placed.
Now, we come to what is limit order in stock trading!
A limit order is an order to buy or sell a stock at a particular price level. This buy order or sell order will be executed only when the stock prices visit the price at which you placed the order. This is different from the market order which gets executed immediately at the price available at the time of order placement.
What is a limit price in stocks – The price at which a limit order is placed is called as limit price. The order may or may not get executed. The order execution depends upon whether the stock prices visit that limit price or not.
What is a limit order to buy – It is a buy order for a stock at a certain limit price. Suppose a stock is trading at current stock price of ₹ 500. However, you want to buy this stock at a price of ₹495. For that, you do not need to keep watching the screen and waiting for that price to come. You can simply place the order for limit price of ₹495 and do some other work. Whenever, the stock price falls to that level, the order gets executed.
However, it is important to know that if you place a buy limit order above market price, your order will be executed immediately. It becomes a market order. In the above example, if the buy order is placed at, say ₹505, the order shall be executed at ₹500. So, the order is executed at the best possible price available.
What is limit order to sell – It is a sell order for a stock at a certain limit price. For sell limit order example,suppose, you hold stocks which you want to sell at ₹510 which is ₹10 above the current price. You can place a sell order at ₹510 which will be executed at only ₹510 stock price. if you place a market order, it will be executed immediately at ₹500.
In case of sell limit order, if you place the sell order below the current stock price, it becomes a market order. The market is giving you the best available price to sell at that time which is the current price.
Difference between market order and limit order
The main difference is the probability of order execution and the better price availability.
- Market order gets executed at current price immediately as you place the order. It may not be the best price to buy stocks or sell stocks because the prices change in a fraction of seconds, even while you are placing the order.
- A limit order gives entry or exit price of your choice but with possibility that the stock price never visits that price and the order remains unexecuted.
- A big advantage with limit order is that you can always modify or cancel your order till it is not executed. This is quite useful because sometimes you may want to change your trading decision or the entry/exit price. This is not possible with market order.
- You can place a limit order even when the market is closed. A market order can be placed during market hours only. This is useful when you want to place an order but may not be able to access the market due to any circumstances.
You should always prefer a limit order out of limit vs market order. Market orders should be rarely used unless urgently needed.
Stop order is an order to stop your losses in the stock trading. It is popularly called as stop loss order. You can use stop loss order to initiate a trade as well as after you have entered a trade and also as a trailing stop loss order.
Stop Order To Enter A Trade – Stop order is useful here to get an entry into trade above a resistance level for a buy order and below a support level to enter a short trade or for short selling.
Lets understand with an example! Suppose a stock is trading at ₹500. It has a strong resistance at ₹505. You want to enter the trade for further upside only above ₹505 price. You can simply place a stop order with stop loss price at ₹505 and limit price, say, at ₹507. As soon as the stock moves to ₹505, the order is triggered and this fills your buy order. If you do not place the stop order and place only a limit order at ₹507, it will be executed at the current price only which is ₹500 at that time.
Similarly, you can place a sell order for a short trade using a stop order. Take the above example. Suppose, the stock has strong support at ₹495. On breach of this support you expect significant downside, ideal for a shorting a stock. You can place a stop order at ₹495 and limit order at, say, ₹494. As soon as stock reaches at 495, the order will be triggered and execute the short sell order at ₹494.
Stop Order As A Stop Loss – You can simply use the stop order as your stop loss order for a trade. You can fix a price level based on your technical analysis or research or arbitrarily up to which you can bear maximum loss. Beyond that, this order is executed and your losses are limited.
Suppose, you buy stocks at ₹500 and expect it to move higher. However, in case unfavourable stock movement, you want to limit loss and exit the trade at ₹495. You can place the stop order at ₹495 and a limit price little more lower. If the stock starts falling lower, you will be out of the trade when the price hits your stop loss price of ₹495. Likewise, you can use stop order as your stop loss order for a short trade.
Stop Order as a Trailing Stop Loss – A trailing stop loss order is very useful in case of a profitable trades. It is used to lock the profits against adverse market moves. There are times when your trade is in profits and you are in dilemma. Dilemma is if you should take your profits or give some more time to add more profits. But staying in the market is always risky and you may lose your profits also.
In stock trading, always prefer a limit order to a market order. This avoids the risk of order execution at unfair prices. After you enter a trade, make a habit of putting stop loss order immediately. With stop loss, you can avoid unnecessary losses if the stock moves in opposite direction.
Here you can employ the trailing stop order to protect your profits. With trailing stop loss, you can lock in your profits by moving your stop loss higher incrementally as the stock moves in your desired direction. Anytime stock reverses, your stop loss is triggered and you get your profits in your bank account.
It is important that we make a habit of using stop loss order in each trade. This brings a discipline in your trading. If your stop loss order is triggered, never renter that trade. You can pile up losses otherwise.
Stop Limit Order
Stop limit order is placed to buy or sell a stock at a certain price only once a stop price is triggered. Like a stop order, it also consists of two orders – stop order and a limit order. However, there is slight difference between both of them.
In case of stop order, the order is executed immediately at limit price or lower best available price oncle stop loss order is triggered. The stop limit order will be executed only on the limit price oncle stop order is triggered. If the stock keeps moving to unfavourable direction and does not visit the limit price, the order shall remain as unexecuted.
Suppose, you hold a stock, trading at ₹500 and you want to exit the stock if the stock starts moving lower towards ₹495. So, you can place stop limit sell order with stop price at ₹494 and limit price at ₹495. Now, if the stock moves to 494, it activates the limit order. But the order will be executed only if price moves higher to 495. If the price suddenly moves to 494 and further lower and never visits 495, the order will not be executed.
The stop limit sell order is used to avoid exiting the trade at much lower price and control the exit price at your choice level. In contrast, the stop order makes you exit the trade immediately once the stop order is activated. The stop limit order is not visible to the market unless activated. It is visible only once the stop price is triggered.
Similarly, you can use buy stop limit order to enter a trade at a specific price. It gives you entry to a trade only at the limit price and not at any higher price once stop price is triggered. The ultimate purpose of the stop limit order is to lower the buying or selling risk by giving a precise entry or exit from a trade.
A limit order is always visible to the market through broker.
Valid Till Cancel Order
This is another type of limit order. This is variant only provided by the stock brokers.
With valid till cancel (VTC) order, you can place a limit buy order to buy stocks on price of your choice. This is a time based order which remains valid till it is executed or its validity expires.
You can fix a time limit, say, 15 days to buy a stock. If the order is not executed on a day, the order expires and system places the same order next day before market opens. Thus, you don’t need to place the order again and again if it is not executed.
This is really useful to traders who do not have enough time to daily login to their trading account and place fresh limit buy order for a stock.