Market Orders, Stop Orders & Limit Orders
The stock marjet orders that are placed with the exchanges for buying or selling stocks can be classified into different types. An instruction to buy or sell a stock at the current market price is called a “market order.” This order is usually executed near the quoted price at the time of the order was made. There may be a difference between the actual transaction and the quote if there is some inactive trading of stocks or rapid fluctuation of prices.
An expectation of stock price movements that leads to the interest of buying or selling stocks at a certain price above or below the current price initiates the placing of either a “stop order” or a “limit order.” A stop order instructs the broker to trade at a certain stock price, while a limit order instructs the broker to trade at a specified stock price or something better.
Stop orders (also referred as Stop Loss Orders), which help in limiting losses and protecting profits, become effective when the market hits the stop price. Because the stocks are traded at market price after they become active, brokers who are given stop orders are allowed to trade above or below the stop price. Limit orders, on the other hand, may not be placed at all even if the market reaches the limit price. The fast movement of the market may not provide enough time to execute the order before the price falls out of the limit price range.
For example, an investor buys a share of Reliance Industries (RIL) at Rs 2000 and put in a stop order of $1900. If the stock price of Reliance Industries falls to Rs 1900, the stop order will become effective and the stock will become available at market price. Conversely, if an investor buys RIL for Rs 2000 and put in a limit order to sell at Rs 2200, then his stocks will be sold at a profit only when the price rises to that level of Rs 2200 or higher. The investor can also buy RIL with a limit buy order for Rs 1900 to allow him to possibly buy the stock at a price that is less than the current market price. If the price doesn’t fall to the limit buy price, however, the investor cannot buy that stock.
All orders can be placed as either “good until canceled” (GTC) or “day order” or “immediate or cancel ”(IOC). A GTC order will remain in effect until it is canceled but a day order will remain in effect only until the end of the current trading day. Stocks are commonly traded in multiples of 100 that are called “round lots.” Trading other amounts of stocks, which is called an “odd lot,” is also possible. Trading software can handle either type of orders but odd lot orders are considered to be more difficult to fill than round lot orders.
