Types of Market Orders

Placing a trade order seems easy enough: Click the ‘buy’ button to enter a trade and hit ‘sell’ when it’s time to get out. While it is possible to execute trades this way, it’s not very efficient since it requires constant monitoring and exposes traders to unnecessary financial risks. There are numerous order types that can help one trade with precision while limiting potential losses.

As one considers which order type should be selected, following questions need to be answered first by him:

1.     Am I trying to buy or sell?

2.     What price do I want—the current price, higher price or lower price?

3.     How much am I willing to lose?

It is then that the order type of order should be selected that best suits his trading style. The most popular types of market orders are:

  1. market order is a type of order in which you can buy or sell a security immediately. This order type guarantees that the order will be executed, but the execution price is not guaranteed.  The purchase will be done at the lowest possible price and the selling will be done at the highest possible price. Such an order cannot be changed during the matching period. Also, it is not valid for block deals. A market order is always subjected to fluctuations in the market. In volatile markets, the price at which this order is executed often deviates from the last quote. They work well when the markets are uni-directional. If one is buying in a falling market or selling in a rising market, then they help realize the best possible price. 
  2. limit order is a type of order where a trader wants to buy or sell a security at a specific price or better. A buy limit order is executed at limit price or lower and the sell limit order is executed at limit price or higher i.e. orders are executed at the best price for traders. These orders can manage risk a lot better than market orders. Traders need to remember that limit orders can be modified based on the evolving market conditions and can be cancelled if the price movement is not favouring the limit order. They are flexible as they can be converted into market orders if required. The stop loss price may be set at a level perceived to be good from fundamental and technical perspectives. These orders are suited best for volatile markets.
  3. stop-loss order is the order that is initiated when the price of the stock reaches the specified price, known as the stop price. It is a defensive mechanism used to protect against further losses. When the stop price is achieved in the market, a stop order converts to a market order.  Trades are closed at the current market rate, but in a fast moving market there may be a gap between this and the stop-loss rate. These orders can only restrict losses and not prevent losses. It is used to set alerts/triggers for stocks and control losses. For example, ABC stock is bought at Rs. 50 and the stop loss is set at Rs. 45. Suppose investors start selling the stock due to unfavourable news about the company and the stock starts falling and reaches Rs. 45, the stop loss order will get triggered and the stock bought at Rs.50 would be sold.

The option of disclosing quantity of the order that is placed on the trading terminal is quite significant as disclosed quantity helps hide the exact quantity that one wants to buy or sell. One could place an order by mentioning the disclosing quantity which is then sent to exchange, where only the disclosed quantity will show.

This is advantageous for people who trade in big quantities because if people see a large order has been placed, they will correct their orders to a price value before our order so that they need not wait in queue. This would probably take huge time or the order may not get executed and market could go down. At least 10% of the order quantity need to be mentioned.

To make profits and be successful, traders must know which order type is best suited for a given situation as it impacts the overall risk and costs involved in execution of a trade.



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