Simply, Order placement refers to the process of placing a trade order. Trade Order means various types of orders which can be placed on stock exchanges for financial assets like stocks and futures contracts. It consists of instructions to a broker/brokerage firm to purchase a financial asset on behalf of investors. Complete trade consists of at least two orders which means one person places an order to buy financial security and another person places an order to sell the same security. Whether the order is a ‘buy’ order or a ‘sell’ order that should be specified. If a trade is entered with a buy order, it will be an exit with a sell order and vice-versa.
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Features of an Order:
- Trade order is a fundamental trading unit of the securities market.
- Order can be placed through various ways such as over the telephone, online trading platform, automated trading systems, and algorithms.
- Trade orders can be Buy-order or Sell-order.
- Orders are accepted from both individual and institutional investors.
- Buy order trade is the exit by sell order and sell order trade is the exit by buy order.
Types of Order:
- Market Order: Market Order refers to a trade order to purchase or sell a stock at the current market price. In Market Order, the price is set by the market which means the individual does not control the amount paid for the buying or selling of stock. It possesses a higher slippage risk. Slippage risk means a risk of price moving in an unfavorable direction after the order placement. It is used when an individual wants the order to be processed as quickly as possible.
Example: A trader places a market order to buy a stock when the price is Rs.450. In the seconds between the order is placed and it is executed, the price increased to Rs.452. Now, the trader who placed a market order will pay more for the stock.
- Limit Order: A limit order is an order to purchase or sell a stock at a specific set price or price better than a set price. This limit order prevents investors from purchasing or selling stocks at a price that they don’t want which means above the limit set by them. In a limit order, the trade order will be executed only when the market price is in line with the limit order. Limit orders only get filled at the price trader expects or better price than expected. A limit order can be a Buy Limit Order or Sell Limit Order.
Example: The stock price of XYZ stock is Rs. 70. If a trader puts the limit order to buy the stock at Rs. 60, the stock will be purchased only if the price falls down to Rs. 60 or lower than that. This limit order gives a guarantee to the buyer of paying Rs.60 or less according to the stock price movement. This means he is not required to pay more as the price is guaranteed. Though, it does not give a guarantee of fulfillment of the order.
- Buy Limit Order: It is used by buyers. It specifies that the buyer will not pay more than Rs. X per share with the Rs. X being the limit order set by the buyer.
Example: The stock price of ABC stock is Rs.50. An individual sets a limit order to purchase 100 shares at Rs. 45. In this case, the trade will be executed only when the price drop to Rs.45 or lower.
- Sell Limit Order: It is used by the seller. It specifies that the seller will not sell a share below the price X per share with Rs. X being the limit order set by the seller.
Example: The stock price of ABC stock is Rs. 50. An investor sets a limit order to sell 100 shares at Rs. 55. In this case, the trade will be executed only when the price move to Rs.55 or more.
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- Fill or Kill Order: Fill or Kill Order is a conditional order. This order instructs a trader/broker to execute the transaction either immediately and completely or not at all. This trade order is often used by active traders and for large quantity stock. A Fill or Kill order is directed to execute immediately at either market or specific price or cancel if not filled.
Example: An individual wants to sell 25000 shares at Rs.50 per share or better. He placed a Fill or Kill Order. If the share price drops below Rs.50 by any extent, the order cannot be filled and it will be canceled automatically. If the share price was Rs.50 or more, the order would have been filled automatically.
Trade order is a fundamental trading unit of the securities market. Orders are used to buy and sell stocks, currencies, futures, commodities, options, etc. Markets facilitate different types of orders that provide for investing discretion when planning a trade.
Author: Hetvi Shah
About the Author: Hetvi is a BBA(Finance) graduate. She is currently pursuing an MBA with Finance specialization. She has a keen interest in Financial Market, Financial Management, and Financial Analysis.