Knowing different types of brokerage orders will help you fine-tune your strategy of making money in the stock market. Before taking you to different types of brokerage orders, let us first understand what a brokerage order is.
In the stock market, brokerage order means an instruction given by a market participant to a stockbroker to buy or sell a security on behalf of the market participant.
These brokerage orders are placed online through a trading platform. Certain brokers are allowing traders to place orders over the phone.
We have different types of brokerage orders defined based on the restriction that market participants want to place on the price and time while executing their order.
Through a brokerage order, market participants tell the stockbroker:
- When they should buy the stock?
- What price are they ready to pay?
- When and how the order should be filled?
- At what price they want to get in and out quickly?
In simple terms, brokerage order is an instruction on how to proceed in buying and selling stocks.
How stock prices are determined
Knowing how the market decides the stock price will help you to find out which brokerage order types you should place and why.
In the market, securities are traded through a bid/ask process based on the demand and supply of the stock. Which means, if you want to sell, there must be someone willing to buy at the selling price you offered.
To buy a stock, there must be a seller willing to sell the stock at buyer’s price.
No transaction will occur unless the buyer and seller come together at the same price.
Bid and ask prices constantly change on the basis of brokerage orders received by the stockbrokers from market participants. Bid is the highest price someone is willing to pay for an asset. Ask is the lowest selling price offered by someone who is willing to sell an asset.
Bid and ask will change constantly based on the brokerage orders placed by market participants through stockbrokers. These stock prices will keep changing as and when brokerage orders are placed through stockbrokers.
Let us discuss these brokerage orders that can be placed by market participants to buy or sell stocks. Please note these brokerage order types are not specific to buying and selling of stocks. These are also used to buy and sell currencies, futures, commodities, options, bonds and other assets.
Remember, you need to keep in mind the bid and ask prices before placing a brokerage order. If the brokerage order placed by you matches with the price offered by other market participants, your order will be filled.
Brokerage orders can be broadly classified into following two categories;
- Time related
- Conditions related
What is time related brokerage orders
In simpler terms, time related order means, its valid for a time limit.
We have two types of time related brokerage orders;
- Day order
- GTC – good till cancelled
Day order is valid for one business day. Which means, a day order to buy a stock expires at the end of that particular trading day.
For example, immagine you placed a day order with your broker to buy stock of company A at a price of Rs 100 on 13.05.2020. In this case, your day order will be valid till the closing hours of 13.05.2020. If stock of company A hit that price, then the order will be executed or else the order will expire at the end of 13.05.2020.
If you don’t specify time with the order, then brokers will automatically consider it a day order.
GTC – Good Till Cancelled
As the name suggests, GTC or Good Till Cancelled order stays in effect until its transacted or until the investor cancels it.
For example, suppose you want to buy stock of Company A at the price of Rs 40 per share. The current market price is Rs 48 per share. You can place a GTC order to buy the stock at Rs 40 per share only. Your broker will buy the stock at Rs 40 or else it won’t buy unless you cancel the order.
It comes with certain conditions. Therefore you need to consult your broker and understand their policy.
Our second category is condition related orders.
What is condition related brokerage orders
As the name suggests, condition related orders are executed by the broker when certain conditions are met. Here are three different types of condition related brokerage orders.
An order to buy or sell a particular stock at the current market price is referred to as Market Order. It’s known as the simplest order for buying and selling stocks.
For example, suppose you want to buy stock of company A at the current market price. You place a market order. The broker will take your order and get you the required number of company A’s stock at the current best available market price.
The best part of market order is you get the stocks immediately. It’s executed in chronological order.
Stop Loss Order
Stop loss order is an instruction to the broker to sell a particular stock only when the stock has reached a particular price.
The moment the price has reached the target, it converts to a market order and gets executed.
For example, assume that you have stock of company A at a price of Rs 10. Now the current price is Rs 20. To protect your gain, you can place a stop loss order at Rs 18, as your wish. If the stock of company A falls to Rs 18, your broker will execute the order.
In this case, following two things can happen;
- Stock of company A has gone further down to say Rs 16, or
- After touching Rs 18 mark, it has bounced back to say Rs 22.
In the first case, you prevented further loss by selling the stock at a higher price Rs 18. This is the benefit of stop-loss order. It prevents your losses in case of major decline in stock price.
In the second case, you are not able to make further profit by selling at a higher price of Rs 22. It’s the negative side of stop-loss order. Due to this reason, investors don’t put stop loss orders close to the current market price.
What is trailing stops
Market participants use different techniques to avoid loss in the stock market. One of such techniques is trailing stops.
A trailing stop is not a new order type. It’s a stop loss order.
But in it, what the investor does is that they move the stop loss order up along with the stock’s market price. The main objective is to protect your wealth as much as possible as the stock moves forward.
Remember to change the stop loss order when the stock price moves significantly.
In a limit order, you specify a limit either to buy or sell a stock.
For instance, suppose you want to buy a stock only at a specified price or better, you place a limit order.
In general limit order works well, when you want to buy a stock. It may not help you when you want to sell a stock.
For example, suppose you want company A’s stock but you are not willing to pay the current market price of Rs 20 per share, you can place a limit order. Limit order can be placed based on your price that you want to pay. Suppose you are ready to pay Rs 18 per share, then you place a limit order with your broker to buy @18 per share.
Remember, your limit order will be executed only when share price matches to Rs 18 per share, no more or less.
If the stock price comes down to Rs 17.90 per share, then your order will not get executed. The only way to get executed is when the share price rises back to Rs 18 per share or you change your order to market order or change the limit order to match with the current price.
If the stock price keeps falling and you did not change your limit order, then it will expire and get canceled.
Similarly, limit order to sell a stock gets activated only when the market hits the specific price the investor mentioned in the order. In such a case, you will be left with the stock if it did not bounce back to your price, in which case you may be forced to sell the stock at far below the price you set earlier. Therefore, most of the market participants while selling volatile stocks use market order.