When you are trading online, you should use the right type of order to get your trade right.
Trading in stocks has moved from ‘trading ring’ to telephone calls to desktop computers. Now, desktops have been replaced by mobile apps. The small screen gives you access to thousands of stocks listed on the stock exchange. But that also means you are supposed to take charge of your trades – checking quotes, assessing market breadth and placing the order right. Brokers offer you facilities in the form of various types of orders that you can use to your advantage. Let us understand more about them.
Most beginners start with market orders. They check the quote and place the buy order to pick the stock at the ongoing price. Market order is thus used to buy or sell shares at the going rate in the market. In case of highly liquid stocks market orders can be used without much thought, as there is a high chance that orders involving small quantities go through without much of impact cost.
“Market order is placed when market is directional. When one places a market order the trade gets executed immediately and one can take advantage of the directional move,” says Siddharth Sedani, head & VP – equity advisory, Anand Rathi Share and Stock Brokers. “While market order is placed to take the position at the prevailing price in the market, limit order is beneficial when someone wants to accumulate a stock at a particular level.”
These work far better in case of illiquid stocks or stocks with large bid-ask spreads. One can place an order with desired quantity and the price at which he wants to transact. The order is valid for the day and if the stock reaches that price during the day, then the transaction is carried out. For example, you may want to buy shares of ACC at Rs 1,670 and the stock is currently quoting at Rs 1,700. You may choose to place an order for the desired quantity with a price of Rs 1,670 by using limit order and forget it for the rest of the day.
Technical traders looking to trade a particular stock above or below a particular level choose to use a limit order. “Almost 80% of the orders placed are limit orders,” says Pankaj Purohit, senior vice president IT and Systems at Motilal Oswal Securities.
Stop loss order
Most traders are worried about their positions going awry. Many of them initiate a position with a stop loss in mind. For example, a trader wants to buy a stock at Rs 100 for a target of Rs 110 with a stop loss of Rs 95. He can buy the stock at Rs 100 and then immediately place a stop loss order to sell the stock at Rs 95. Some brokers also allow the trailing stop loss order. Here the trader can give a trailing stop loss in points term. In the above example, if the trader has given 5 point trailing stop loss, then the SL will move to 100 when the stock goes to 105.
Sometimes, traders place two orders. To sell the stock at 95 rupees as stop loss order and to sell stock at Rs 110 as profit booking order. The trouble is - if the market is too volatile both these orders get executed and the trader lands in a problem. “Bracket orders can be used in such circumstances. When one of the two orders gets executed, the other order gets cancelled,” says Nithin Kamath, founder of Zerodha, a discount broker.
For the beginners, the bracket order allows you to place two orders at one go. In the above example, one buys a share at Rs 100. Two sell orders can be placed one at Rs 95 and the other at Rs 110. If any of these orders get executed, the other gets cancelled immediately.
In case one has gone short on a stock at Rs 100. He may place a stop loss buy at Rs 105 and a book profit order (buy) at Rs 90 using bracket order.
Bracket orders are meant for day traders looking to make a quick buck on a trade. You need not keep observing the trade terminal throughout the day. On both sides – loss and profit, your trade is in safe hands.
Time bound orders
Indian stock exchanges allow you to place an order for the day. Put simply, all your pending orders get cancelled at the end of the day. They are called ‘Good Till Day’ orders. But some brokers allow you to place ‘good till cancelled orders (GTC)’. The order so placed remains in the system of the broker if it is not executed in the day. The same order is then sent to the exchange the next day. Such orders can be used to accumulate stock by savvy investors. But you need to keep a track of such orders as the desired price at which you want to buy a stock may change over a period of time. Sometime you may not want to buy a stock any more. If such a GTC order remains in the system, then it can surprise you at a time you least expect it to.
Immediate or cancelled (IOC) is a type of order that lets you trade at that moment in time. “A trader willing to transact a particular quantity of share at a particular price and at a particular moment of time uses IOC order,” says Pankaj Purohit.
Margin based trade orders
Sometimes the traders have trading ideas but they run short of funds. Brokers let such traders place their bets till the trade size is within certain multiple of their cash balance with the broker. A trader may place a bet say 4 times his balance with broker. For example, if you have a balance of Rs 25.000 with broker, the broker may allow you to take a bet wherein the traded value is Rs 1 lakh. While placing an order, the trader can select ‘margin’ option. This lets him take an exposure four-to-five times his money kept with the broker. These orders get squared off by three in the afternoon. Put simply, if you have bought shares using such facility, your shares will be sold at 3 pm on the same day and the other way round.
If one wants to carry his position forward, the broker may let him do so by charging him interest –margin charges in the industry parlance.
In addition to these, some brokers also allow placing basket orders. Basket orders let traders place multiple orders in one go. You can buy or sell many stocks or futures and options contracts in one go. However, these are placed through desktop applications or through web-based platforms.It makes a lot of sense to match your needs with the way you place an order. It can improve your trading experience.