Tuesday, 19 January 2016

Types of Orders in Stock Market

Market Order vs Limit Order vs Stop Loss Order 



Market Orders
A market order allows you buy or sell a stock at the prevailing market price. When you place an order during normal market hours (9:15 AM to 3.30 PM), a market order typically executes within seconds. There are certain brokers in India who allows After Market Order, When you place a aftermarket order during non-market hours, Trading System automatically moves the trade when market opens, so the order executes as soon as possible.

Market-Order
Market Order 





Limit Orders
A limit order allows you to specify the maximum amount you are willing to pay for a security (when you buy) or the minimum amount you are willing receive for a security (when you sell).

Examples:
  • Buy Limit Orders: Let's say you want to buy NIFTY Jan Future for Rs 7420.00 or less and the current market price is Rs 7435. You can enter a limit price at Rs 7420, and trading system will only NIFTY Futures if it trades at Rs 7420 or less. If NIfty Futures trades above the limit price, the buy order will not execute. Typically, the limit price for a buy order is placed at or below the current Ask price

Buy-Limit-OrderSimply speaking you want to buy at a lower price than market price and only and if there is a seller at your price , order will get executed else it won’t

  • Sell Limit Orders: Let's say you want to sell NIFTY Futures at 7450 and Nifty is trading at 7435, in this case you can enter a limit price at Rs 7450, and trading engine will only sell the futures if it trades at 7450 or more. If the security trades below the limit price, the sell order will not execute. Typically, the limit price for a sell order is placed at or above the current Bid price.

Stop-Loss Orders

A stop-loss order can help you limit your losses. If the market price reaches or crosses through the Stop price, your order is sent to the exchange as a market order.
Example:
  • Sell Stop-Loss: When you place a Sell Stop-Loss order, you create a "floor" for your position. Let's say you have bought Nifty Futures 1 Lot at Rs 7500 and you'd like to sell i.e (Target Price) at Rs 7550 or book loss if the price reaches Rs 7450.00. You can place a Stop-Loss order and enter a Stop Price of Rs 7550 & Rs 7450 respectively for Target Price & Stop Loss. If NIFTY reaches Rs 7550 or 7450 , the order triggers and becomes a market order. You'll get the current price available for the security under the prevailing market conditions.           *Remember you have to manually remove other stop loss order if anyone of them is executed
Sell-Stop-Loss-Order
Sell Stop Loss Order
To clarify further below image is an example for Nifty Futures 
  • Buy Stop-Loss: When you place a Buy Stop-Loss order, you create a "ceiling" for your position. Let's say you shorted a Nifty Futures 1 Lot at Rs 7500. You'd like to buy i.e (Target Price) at Rs 7450 or book loss if the price reaches Rs 7550.00. You can place a Stop-Loss order and enter a Stop Price of Rs 7540 & Rs 7550 respectively for Target Price & Stop Loss. If the contract price reaches 7450 or 7550, the order triggers and becomes a market order. You'll get the current price available for the security under the prevailing market conditions.
To clarify further below image is an example for Nifty Futures

Buy-Stop-Loss-Order
Buy Stop Loss Order

Criteria:
  • Sell Orders: The Stop Price must be entered at least 0.05 below the current Bid Price in Indian Market 
  • Buy Orders: The Stop Price must be entered at least 0.05 above the current Ask Price in Indian Market 

Problem with Stop Loss Order , Please check the below example 

You Bought Nifty Futures at Rs 7500 – Margin Levied Rs 50000/-

You Put a Stop Loss Order for Profit booking at Rs 7550 – Margin Levied Rs 0, 

As the Nifty Futures at this point of time haven’t reached 7550 and to safe guard yourself you are entering a Stop Loss order at Rs 7450, in this case the RMS of Trading engine would ask for another Rs 50000/- as Margin Requirement because according to RMS there would anytime remain 1 pending order of 1 Lot of Naked Position of NIFTY
This problem is eradicated in bracket order which is mentioned below 

Bracket Order

Customer places a bracket order such that the parent order (LEG1) is placed with two cover order of the same quantity, ie Book Profit trigger Order (Exit at target)(LEG2) and Loss Exit Order (LEG3).

The parent order (LEG1) is immediately send to exchange, were in book Profit trigger order (LEG2) and Loss Exit Order (LEG3) remains in the trading system  

Once the parent order (LEG1) is executed, the book Profit trigger Order (LEG2) and Loss Exit Order (LEG3) are considered for viable condition, ie the condition to check LEG2 and LEG3 touching the market rate.

Once viable condition favours, either of the cover order, ie Leg1 or Leg2 is generated and placed to exchange for squaring off the position.

Here is an example which might help you to understand how stock market bracketed orders work. If you place a buy bracketed order for 1 Lot of Nifty Futures at Rs 7500 [LEG 1],  you can then set a sell stop order at Rs 7450 [LEG 3] and a sell limit of Rs 7550 [LEG 2] in a single order. This means that for a single order you can input 3 details , Buy or Sell Price, Target Price & Stop Loss Price. In this example Nifty Lot will be purchased at Rs 7500 [LEG 1] will be sold if they drop to 7450 [LEG3]  or rise to 7550 [LEG2] . And there won’t be any pending order in exchange resulting in faster execution of error free trades 

In case if you have any doubt or clarifications please let me know in comment section