Finance

Types of Order Placed in Securities Market

Types of Order Placed in Securities Market

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:

  1. Stop-loss order:

A stop-loss order is also referred to as a stop order. It is an order to buy or sell the stock as the stock reaches a specified price, known as ‘Stop price’. It is a trade order which is designed to limit and protect investor’s loss on apposition. The stop-loss order can be a ‘Buy stop’ order or a ‘Sell stop’ order.

  • Buy stop order: This stop order can be applied to stocks, derivatives, forex, and a variety of other tradable instruments. Buy stop order is entered at a stop price above the current market price. The purpose of this order is to stop the stock from getting away from the investor as the price rises.
  • Sell stop order:

The sell stop order is entered at a stop price below the current price. In this, if the stock price drops to the stop price, the stop order to sell is triggered and becomes a market order to be executed at the current price.  Though, it is not guaranteed to execute near the stop price.

Example:

A trader has purchased a stock at Rs.50/share and placed a stop-loss order at Rs.45/share, and on the closing of that trading day, the stock closes at Rs.51/share. Then, after the closing of the trading day, fatal news about the company comes out. If the stock price gaps lower on the market open the next trading day- say it is opening at Rs.40/share then the traders rs.45/share stop-loss order will immediately be triggered as the price has fallen below stop-loss order price, but it will not be filled anywhere close to 45/share. Instead, it will be filled around the prevailing market price of rs.40/share.

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  1. Short sell order:

Short selling is defined as selling a stock which the seller does not own at the time of the trade. It occurs when there is an expectation of falling the price of securities. It occurs when an investor borrows security, sells it in the market, and then purchases when the prices are lower. All classes of investors are permitted to short sell. Naked short selling is not permitted and delivery of securities is compulsory on settlement. A short seller can not be intraday for the institution. Only those securities traded on futures & options are eligible for short selling.

Example:

An investor believes that Stock ABC which is trading at Rs.100/share, will decline when the company will announce its annual earnings in one week. Therefore, the investor borrows 50 shares while short-selling those shares to the market. Thus, he short sells the stock which he does not own. After a week, when the stock price falls to 80/share when the company announces its earnings. The investor decides to close his position by buying back 100 shares. 

  1. Stop-Limit Order

This order is a combination of Stop order and Limit order. It requires placing two prices- the stop price and the limit price. As the stock hits the stop price, it becomes a limit order. As opposed to stopping order, it guarantees a price limit. The stop order guarantees an order execution but not necessarily at the stop order price.

Example:

An investor owns stock with the price of Rs.50/share. The investor would like to sell the stock if it falls below rs.45 but only if the stock can be sold at rs.42 or more. So, he sets a stop-limit order by setting a stop price of Rs.45 and a limit price of Rs.42. Once the stock falls below 45, the order becomes an Rs.42 limit order.

Conclusion:

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.

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