All About Share Market Orders

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  • 22 Feb 2023
Decoding Market Orders

To invest or trade in the share market, you must understand the process of order placement. If you have a demat and a trading account, you can create and place orders online. The process is both convenient and safe. If online channels are not an option, you could also place share market orders by visiting your broker’s nearest branch or instructing them via the phone.

But share market orders can be of many different types. This article will explain the features and benefits of different types of orders for purchasing or selling stocks in the share market.

Let’s start with the basics. Share market orders fall into two basic categories: buy orders and sell orders.

Buy Order

A buy order is placed when you wish to purchase stock. In general, investors and traders place buy orders when the price of a stock is down and a price rise is expected. When placing a buy order, you must disclose the number of shares you wish to purchase.

Sell Order

A sell order is placed if you wish to sell the stock in the market. Traders may go for this to square off the transaction and earn a profit based on the stock price fluctuation.

Buy and sell orders can be of various subtypes. The focus here is on five common types of share market orders: limit order, market order, stop loss order, stop loss market order, and stop loss limit order.

  • Limit Order

A limit order is an order to buy or sell stocks at a specified price. If the stock price is lower or higher than that prescribed in your order, the order will not be executed. Hence, you must always note the risk of your limit order not being carried out. When placing a limit order, you must also mention the quantity of shares that you wish to trade.

Say, you place a limit order to buy the shares of Company A at Rs 1,000. This means the order will be executed only if Company A’s share price touches Rs 1,000 or drops below it. What if you had placed a limit order to sell Company A shares at Rs 1,000? Here, the order will be executed only when the share price of Company A touches Rs 1,000.

  • Market Order

A market order enables you to buy or sell shares at their current price on the exchange. Thus, a market order is executed at the prevailing market price of the shares.

Say, you placed a market order to buy 100 shares of Company M. Now, suppose the current market price is Rs 1,000. The order will be executed at the prevailing market price of Rs 1,000. Had you placed a sell order, it too would have been executed at the current market rate.

  • Stop Loss Order

Stop loss orders can protect you from heavy losses and save your capital from erosion. With a stop loss order in place, you can minimise your loss on a particular trade. Such an order gets activated only when the price of the stock declines to the specified stop loss price or trigger price.

Say, you bought some shares of Company Q at Rs 1,000 apiece but are afraid that the stock price could decline. To safeguard your position, you decide to set up a stop loss order with a stop loss trigger of Rs 975. Should the stock price dip to Rs 975 or lower, your broker will sell off the shares, thus limiting your total loss. However, as minor price fluctuations are expected, traders should select their stop loss triggers carefully after carrying out rigorous technical analysis.

  • Stop Loss Market Order

A stop loss market order is a mix of a stop loss order and a market order. Here the order is placed at a specific trigger price. Once the stock price reaches or dips below the trigger price, the order is executed as a market order.

Let’s consider an example. Say, you buy a stock at Rs 1,200 and place a stop loss at Rs 1,170. This means that your shares will be sold when the stock’s market price reaches Rs 1,170. However, suppose a major news event takes place and buyers are no longer willing to buy the shares at Rs 1,170. The highest buy order price at the time is Rs 1,160. Once the share price drops below Rs 1,170, the stop loss order will go active and look for the nearest buyer. Since the nearest buyer is at Rs 1,160, the order will be executed at this price.

  • Stop Loss Limit Order

A stop loss limit order is a combination of a limit order and a stop order. Here, a stop loss limit is placed at a particular price. When the market price reaches that particular price level, the transaction is executed. The stop loss limit order carries out the trade at the specified price—or at a better price if that is possible.

Let’s look at this through an example. Say, you have bought shares priced at Rs 1,200 per share. You now set up a stop loss limit order with a trigger price of Rs 1,170. Here, your stop loss limit order will try to sell your shares at Rs 1,170 (or at a higher price if that is available). Now, suppose a new event leads to a decline in the stock price and the market value drops to Rs 1,160. Since you placed a stop loss limit order, the order will not get executed at Rs 1,170. It will wait to try to sell the shares at Rs 1,170. If the stock price bounces back to your trigger price Rs 1,170, your order will get executed. Thus, you will have avoided incurring an additional loss of Rs 15.

However, remember that there is a chance your stop loss limit order might not get executed. This may happen if the stock price does not bounce back to Rs 1,170. So, it is important to keep tabs on the prices to avoid losing money indefinitely.

Trading and investing in the share market bring great potential for wealth creation, but there is also an inherent risk. This is why it is important for traders to use stop loss orders wisely. Let’s look at some of the ways in which stop loss reduces the risk of loss in the share market.

  • Limited Capital Erosion

Stop loss helps protect the limited capital of the trader. A stop order gets triggered when the stock price reaches a particular price point and the trade is squared off. Even though the trader incurs a degree of loss, a stop loss order mitigates the possibility of unlimited loss.

  • Leads To Trading Discipline

Traders focus on stocks that carry a favourable risk–reward ratio. But even seemingly lucrative trades can lead to big losses. That’s why seasoned traders set stop losses on every order to restrict their losses. Setting such triggers involves prior research and analysis by the trader, instilling a disciplined approach to trading.

  • Protection Against Market Volatility

Stop loss is essential when the markets are volatile. In volatile markets, stock prices can show erratic movements and wild swings. The inability to predict these movements could lead to heavy losses for traders. But a stop loss can help traders to stay protected from unlimited losses.

  • Measure Of Risk-taking Ability

Stop loss orders enable traders to measure their tolerance for risk. By placing repeated stop loss orders, a trader can learn how much risk they can afford to take. Going forward, they can then modify their open positions in the market to reduce their risk exposure.

Lowered Risk Of Position Concentration

The term ‘position concentration’ means purchasing the same or similar stocks again and again while the stock price is falling. The right stop loss trigger, however, can prevent you from making the same mistake repeatedly. Say, you purchase a stock at Rs 70 per share and then the price falls to Rs 65. You may be tempted to purchase the same stock again for the purpose of price averaging. If the price then falls to Rs 62, you might wish to buy it again. This would increase your concentration of risk in one stock. Stop loss can help you avoid such overexposure to a single stock.

  • Safeguard Against High Leverage

Intraday traders often use high leverage when taking positions in the market. But that opens one up to risk as it means trading with margin funds borrowed from the broker. This is why seasoned traders use the stop loss feature in a disciplined manner to reduce potential losses in case the trade moves adversely.

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