When you decide to buy or sell shares in the market, you need to first place an order. The order can either be a blanket order or it can be a conditional order. When the order gets executed, it becomes a trade. Normally, when an order is placed, it first shows up in the order book of your trading account. When the order is executed, the status is reflected in the order book while the trade book shows the details of the order execution with price, quantity and trade reference number.
Orders are classified by nature of the order and the duration of the order. Here are some types of orders that you need to know:
Types of orders by nature of the order
There are broadly 4 types of orders based on the nature of the order viz. Market Orders, Limit Orders, Cover Orders and Bracket Orders.
Market orders are placed in the live market to be executed at the best available price. When you place a market order, the system will not worry about the price. It will just keep executing at the best price based on the quantity available. When the market is falling sharply, a buy order works best if it is a market order. Similarly, in a rising market, it is best to use a market order when you are selling so that you get the best price.
A limit order specifies the price at which the order should be executed. When you place a limit order to buy shares then the system will execute the buy order at or below the limit specified in the order. Similarly when you place a limit order to sell shares the system will execute the sell order at or above the limit specified in the order. A limit order will be executed only if the stock meets the condition, not otherwise. Limit orders are best suited to volatile markets.
A cover order is a safe way of trading in the market. Apart from placing the buy sell or sell order, the cover order also defines the stop loss at the time of placing the order itself. In case of a buy order, the stop loss will be below the buy price and in case of sell order the stop loss will be above the sell price. Cover orders enable you to pay lower margins, especially in case of intraday traders.
A bracket order is a slight improvement over the cover order. While a cover order only contains the stop loss, the bracket order also specifies the profit booking target. The bracket order places the stop loss level and the profit booking level simultaneously. When the stop loss gets triggered, the profit order is automatically cancelled. If the profit target is hit first then the stop loss order automatically stands cancelled.
Types of orders based on the duration of the order
There are 3 broad types of orders based on the duration of the order:
Good-till-date (GTD) order
The GTD order is valid in the system till the end of the trading day. When trading closes at 3.30 pm on the trading day the order stands automatically cancelled. If nothing is specified while placing the order then the order is a GTD order by default.
Good-till-Cancelled (GTC) order
This GTC order is valid till the time the order is actually cancelled by the trader. Till that time, the order continues to remain in the system. A GTC order has to be specifically requested for by the trader.
Immediate or Cancel (IOC) order
This is a special type of order which is normally used by aggressive traders who are trying to capitalize on a specific price movement. They will not want their order to be seen on the screen for too long. Such traders employ an IOC order. If the order is not executed immediately on placement, it automatically stands cancelled.