Stock market trading orders can be classified as following based on price conditions. These are the most common type of orders in a stock market. A trader/investor can specify the type of order before submitting the trade.
Market Order: In a market order there is no price specified for the order to be executed. It’s always matched against going market price. For buy orders the price is matched against the top quote on offer side and for a sell order the price is matched against the top quote on bid side. In an order book bid rates are arranged in descending order and offer rates are arranged in ascending order.
Limit Order: In a limit order price at which the order should be executed is mentioned. Usually for a buy order it is specified as ‘less than or equal to a particular price’ and for a sell order it is specified as ‘greater than or equal to a particular price’.
If a buy limit order is placed at a price greater than market price then it gets converted to market order and executed immediately as for that price the there would always be sellers. Similarly when a sell limit order is placed at a price less than the market price then also it gets converted to a market order and there will be fairly good number of chances that it gets executed.
Stop Loss: A customer (investor/trader) can put an order in such a way that the order should be released only when the market price reaches a threshold price (known as trigger price). In a stop loss order the customer has to enter a trigger price, limit price and quantity along with the security code and type. For a buy order the trigger price should always be less than or equal to the limit price and in a sell order the stop loss trigger price should always be greater than or equal to the limit price.
If an investor wants to buy only if the price of a security reaches a certain support level (trigger price in this case). But he is not sure when it reaches on that particular day. In this case stop loss order is useful.
For example, assume for a stop loss order trigger price is Rs 190 limit price is Rs 200 and the market price at the time of placing the order is Rs 185. This order is kept in a separate book called stop loss book. When the market price reaches Rs 190 (known as stop loss triggered) the order is released into the system as a limit order of Rs200. The order will be executed at a price less than or equal to Rs 200 depending on the market price. The stop loss concept for a sell order is similar but opposite.
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Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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