Types of Orders

An investor can have his buy or sell orders executed either at the best price prevailing on the exchange or at a price that he determines. Accordingly, an investor may place two types of orders, namely, market order or limit order.

Market Orders

In a market order, the broker is instructed by the investor to buy or sell a stated number of shares immediately at the best prevailing price in the market. In the case of a buy order, the best price is the lowest price obtainable; in the case of a sell order, it is the highest price obtainable. When placing a market order, the investor can be fairly certain that the order will be executed, but he will be uncertain of the price until after the order is executed.

Limit Orders

While placing a limit order, the investor specifies in advance the limit price at which he wants the transaction to be carried out. In the case of a limit order to buy, the investor specifies the maximum price that he will pay for the share; the order has to be executed only at the limit price or a lower price. In the case of a limit order to sell shares, the investor specifies the minimum price he will accept for the share and hence, the order has to be executed only at the limit price or a price higher to it. Thus for limit orders to purchase shares the investor specifies a ceiling on the price, and for limit orders to sell shares the investor specifies a floor price.

Lrrenlllawaroharketeanhahe limit price is somewhat removed from the prevailing market price. In the case of a limit order to buy, the limit price would be below the prevailing price and in the case of a limit order to sell, the limit price would be above the prevailing market price. The investor placing limit orders believes that his limit price will be reached and the order executed within a reasonable period of time. But the limit order may remain unexecuted.

There are certain special types of orders which may be used by investors to protect their profits or limit their losses. Two such special kinds of orders are stop orders (also known as stop loss orders) and stop limit orders.

Stop Orders

A stop order may be used by an investor to protect a profit or limit a loss. For a stop order, the investor must specify what is known as a stop price. If it is a sell order, the stop price must be below the market price prevailing at the time the order is placed. If it is a buy order, the stop price must be above the market price prevailing at the time of placing the order. If, subsequently, the market price reaches or passes the stop price, the stop order will be executed at the best available price. Thus, a stop order can be viewed as a conditional market order, because it becomes a market order when the market price reaches or passes the stop price.

Examples will help to clarify the working of stop orders. Suppose an investor has 100 shares of a company which were purchased at ` 35 per share. The current market price of the share is ` 75. The investor thus has earned a profit of ` 40 per share on his share holdings. He would very much like to protect this profit without foregoing the opportunity of earning more profit if the price moves still upwards. This can be achieved by placing a stop sell order at a price below the, current market price of ` 75, for example at ` 70. Now, if the price subsequently falls to ` 70 or below, the stop sell order becomes a market order and it will be executed at the best price prevailing in the market. Thus, the investor will be able to protect the profit of around ` 35 per share. On the contrary, if the market price of the share moves upwards, the stop sell order will not be executed and the investor retains the opportunity of earning higher profits on his holding.

Stop orders can also be used to minimise loss in trading. Suppose that a share is currently selling for ` 125 and an investor expects a fall in the price of the share. He may place an order for sale of the share at the current market price of ` 125 hoping to cover up his position by purchasing the share at a lower price and thus make a profit on the deal. This type of a transaction is known as a short sale. If price of the share falls as anticipated by the investor, he would make a profit. There is a possibility that the price may move upwards and in that case the investor has to purchase the share at a higher price to cover up his position and meet his sales commitment. This will result in a loss to the investor. This loss can be minimised by placing a stop buy order at a price above the current price of ` 125, for example at ` 130.

Now, if the price of the share rises to ` 130 or above, the stop buy order will become a market order and will be executed at the best price available in the market. Suppose that the stop buy order was executed at ` 131, then the loss of the investor is limited to ` 6 per share, that is, the difference between the selling price of ` 125 and the buying price of ` 131 per share.

One disadvantage of the stop orders is that the actual price at which the order is executed is uncertain and may be some distance away from the stop price.

Stop Limit Orders

The stop limit order is a special type of order designed to overcome the uncertainty of the execution price associated with a stop order. The stop limit order gives the investor the opportunity of specifying a limit price for executing the stop orders: the maximum price for a stop buy order and the minimum price for a stop sell order. With a stop limit order, the investor specifies two prices, a stop price and a limit price. When the market price reaches or passes the stop price, the stop limit order becomes a limit order to be executed within the limit price. Hence, a stop limit order can be viewed as a conditional limit order.

Let us consider two examples. Consider a share that is currently selling at ` 60. An investor who holds the share may place a stop limit order to sell with stop price of ` 55 and limit price of ` 52. If the market price declines to ` 55 or lower, a limit order to sell the share at the limit price of ` 52 or higher would be activated. Here the order will be executed only if the share is available at ` 52 or above. Thus a stop limit order may remain unexecuted.

Consider an investor who desires to make a short sale of a particular share at its current market price of ` 85. That is, he intends to sell the share without owning it but hoping to buy it later from the market at a lower price. He may also place a stop limit order to buy the share to minimise his loss in case the share price moves upwards contrary to his expectations. He may specify a stop price of ` 90 and a limit price of ` 93 for his stop limit order to buy. If the price moves up to ` 90 or above, then a limit order to buy the share with limit price of ` 93 would be activated. The order would be executed at a price of ` 93 or lower, if such price is available in the market.

The disadvantage of a stop limit order is that it may remain unexecuted. The stop order results in certain execution at an uncertain price, while a stop limit order results in uncertain execution within a specified price limit.

Trading in stock exchanges takes place continuously during the official trading hours. Stock exchanges are open five days a week, from Monday through Friday. An investor may place orders for trade through his broker at any time during the official trading hours, but he needs to specify the time limit for the validity of the order. The time limit on an order is essentially an instruction to the broker about the time within which he should attempt to execute the order.

Day Orders A day order is an order that is valid only for the trading day on which the order is placed. If the order is not executed by the end of the day, it is treated as cancelled. All orders are ordinarily treated as day orders unless specified as other types of orders.

Week Orders These are orders that are valid till the end of the week during which the orders are placed. They expire at the close of the trading session on Friday of the week, unless they are executed by then.

Month Orders These are orders that are valid till the end of the month during which the orders are placed. Month orders expire at the close of the trading session on the last working day of the month.

Open Orders Open orders are orders that remain valid till they are executed by the brokers or specifically cancelled by the investor. They are also known as good till cancelled orders or GTC orders. However, brokers generally seek periodic confirmation of open orders from the investors.

Fill or Kill Orders These orders are also known as FoK orders. These orders are meant to be executed immediately. If not executed immediately, they are to be treated as cancelled.