What Is a Trade Order? Understanding Definition, Types, and Examples: Most of the time, newbies to the stock market are interested in questions like how to enter the stock market, what is trading, and most importantly how can they make money from the markets.

Before that, it is essential to understand the basics such as how you can buy your favorite stock, and how to place a correct order on any stockbroking platform. In this blog we will learn in detail about what is a trade order, what are the different types of trade orders along with examples.

What Is a Trade Order?

What Is a Trade Order: A man with there laptop by doing stock market analysis

 

In simple terms, a trade order is an instruction given to our stockbroker to execute a transaction on our behalf which may be buying or selling of financial assets such as equity, commodities, futures, and options in the stock market through their stockbroking websites or applications. 

Here is a step-by-step process for placing a trade order:

  1. First, open a Demat account with any of the stockbrokers you wish to opt for trading.
  2. Once you have opened and activated your demat account, add sufficient funds to your trading account to continue hassle-free trading.
  3. After all the above things are done, you can place the order to trade, and for that go to either the website or application of your chosen stockbroker.
  4. Next, on their website or app locate the search bar, and there search the name of the share you want to buy/sell.
  5. Once the name of the stock appears you will see two choices “BUY” and “SELL”.
  6. Select the desired action and place the correct order.

Now that we understand how to place an order, let us look at the different types of orders that can be placed to execute the trade.

Also Read: How To Learn Derivatives Trading? – Tips and Best Practices

Types of Trade Orders

The most common types of trade orders that are widely used are as follows:

  1. Market order
  2. Limit order
  3. Stop Loss order
  4. After Market Order (AMO)
  5. Bracket order
  6. Cover order

1. Market Order:

An order which is placed to buy or sell the stock at the current market price is a market order. Here the trade (the buy or sell action) is completed at the currently existing market price of the stock.

For example, if the price of XYZ stock is currently trading at Rs 150 per share and if you want to buy or sell shares in any case. Then if Market Order is placed, the trade (buy/sell action) gets executed instantly at the market price of Rs 150 only.

2. Limit order:

A limit order is a customized order that helps a trader to buy or sell the stock at a specific predetermined price. Here we can set the desired limit at which trade should be completed and when the price hits the desired limit the trade action (whether buy or sell ) gets executed automatically. The benefit of the limit order is that it makes sure that trade is executed as per the limit prescribed only. 

For example, if a share you already held is trading for Rs 165 and you don’t want to sell it below Rs 155 you can set a limit order. Once the stock hits the trigger price of Rs 155 then the limit sell order gets executed. The same can be used to place buy orders.

Read More: Market order vs Limit order: Basics of stock market

3. Stop Loss Order:

A stop-loss order is a buy or sells trade order placed to limit the risk of losses that may occur when the share price moves against the expected trend of the trader. It is generally placed according to the risk-bearing capacity of the trader which differs from one person to another. 

A stop loss order is always a safety net order which must be used by all the traders and investors to reduce the risk of loss as the name says.

Let us understand it more clearly with an example, if you have a share of ABC Company which is trading at 300 per share, and while selling it, the maximum risk you can take is upto Rs 10 per share, then you can put a stop loss order at Rs 290 per share and when price touches 290 the order gets executed.

Since most of them get confused between Stop Loss and Limit order as they seem to be familiar, here is a key difference between them.

Stop Loss OrderLimit Order
In stop loss order, a Market order is initiated and executed when the stock price hits the trigger price.In a limit order, the predefined limit order is initiated and executed when the stock price hits the trigger price.

 

 

4. After Market Order (AMO):

After Market Order is a trade order that is placed when the trading session for the day is closed and it gets executed once the market opens on the next day. It is more helpful for people who cannot trade actively during regular trading hours in the stock market. In the Indian stock market context any order placed outside trading hours 9:15 am to 4:00 pm IST is an AMO.

5. Cover Order:

A cover order is a combination of two orders which is generally a market order or Limit order placed along with the compulsory Stop Loss order to buy/sell a share. This feature helps traders to plan their risks in advance and try to reduce them considerably. 

Here first the Market order gets executed and simultaneously when the stop loss is triggered, the stop loss order also gets placed. Since it’s a combined order any individual order alone cannot be canceled.

Let us understand it with an example: If you are placing a sell order for a share that is currently trading at 350 to sell at Rs 360 (slightly higher than the current market price) your stock gets sold when the price moves up to 360. 

But if there is a downfall you can protect your capital by putting a stop loss at 345. This will help you limit your losses to the extent of Rs 5 per share in case of any downward movement,

Similarly, it can be used for buy orders that will help investors or traders to buy the stock at the best price possible in a fluctuating market.

6. Bracket Order:

A bracket order is an advanced order with a combination of 3 orders clubbed together into one complex order. It is a combination of the Initial (buy/sell) order along with the stop loss order plus the target order. 

This order helps traders to protect his/her money in all types of market scenarios, whether it may be an uptrend, downtrend, or sideways (stagnant) market. The key point to remember here is that Bracket orders always work at a limited price and not the market price.

Let us understand clearly by seeing an example, if you have bought a share at Rs 400 per share and want to sell it you can put a bracket order with an upper target price of 450  and a Stop Loss order at 390. 

Under the bracket order, we can see 3 possibilities for every order. Here are the scenarios:

  • Uptrend market: If the market moves in an uptrend and prices start to rise, then the upper target order gets executed when the price reaches Rs 450 and the stop loss is cancelled automatically.
  • Downtrend market: If the market moves in a downtrend and prices start to fall, then the stop loss order gets executed when the price reaches Rs 390 and the target order of the upper price is cancelled automatically.
  • Sideways (Constant) market: In a sideways market, if the price level remains the same and does not fluctuate, then the order gets cancelled because it is a limit order and trade will not occur if this limit price is not triggered.

Also Read: Meaning And Difference Between Order Book And Trade Book!

In closing

In this blog, we tried to learn in detail about what is a trade order, what are the different types of trade orders used in the stock market, and how it is useful for us in minimizing the risk of losses suffered. Hope it adds value to your investment journey. Let’s continue to learn and happy investing.

FAQ: 

1. What is the maximum quantity i can trade in a single order?

The maximum quantity you can trade in a single order one or more than one depends on the specific rules and regulations of the trading platform or exchange you are using. It is recommended to check the platform’s guidelines for the exact limit.

2. How long does a trade order last?

The duration of a trade order depends on the type of order placed. Market orders are typically executed immediately, while limit orders and stop orders can have a specified time limit or remain active until manually cancelled. It’s best to check with the trading platform or broker for specifics.

3. Can I cancel a trade order?

Yes, traders can typically cancel their trade orders as long as the order has not been executed. This can be done manually through the trading platform or broker’s interface

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