Types of Orders in Investment:- In order to buy or sell securities, there are different types of orders that can be used by investors. When investor places certain order, he expects that all the relevant persons of the order processing step understand his instructions. There are different standardize packets of instructions that are used to aid the order processing process in the brokerage business. The main Types of Orders are Market Order, Limit Order, Stop Order and Other Orders.
Types of Orders Taken by Investors
- Market Order
Market order is the most common among all the types of orders. When an investor uses market order, he in fact relies on the fair pricing function of the market. In the light of this order, the securities are brought or sold by the broker at the best price existing at the moment. The main point in the market order is that after reaching the exchange floor, it should be executed as soon as possible.
- Limit Order
In certain situation, the investor is not happy to buy or sell at the existing market price. Rather he determines his own price and trade only when that set price is accomplishable. In fact price & time limit is specified in the limit order. Generally time limit is based on day or Good Till Canceled (GTC). If day orders are not executed then they are expired at the close of the business. On the other GTC orders stay open to the point when they are fulfilled or when the investors cancel them. Limit orders are beneficial but their usage should be at suitable moment. The distant limit price of limit order from its current market price is referred to as away from the market.
- Stop Order
A stop order is similar to limit order in such a way that it also set price and time limit. But the difference is that the stop order is fulfilled only when the set price or stop price is reached. When the stop price is reached stop order becomes market order. It is therefore impossible that the actual sale price is different from the stop price. Stop order is actually used to minimize loss & protect profit. The placing of stop order or raising of stop price does not require any cost. Only brokerage commission is paid when the trade is made.
The adjustment of stop up on the basis of rising stock is considered as crawling stop order. It is quite different to ascertain the accurate price at which the stop order is placed. When there is much difference in the stop price & the current market price, the investor faces high level of risk for potential loss or good portion of any gains is forsake. On the other hand if stop price is quite close to the market price, then the stop order is executed from random movements over bid & asks prices without any potential price movements.
Recently an article is published in the Journal of Portfolio Management in which a methodology is suggested stop order can be set by the investor on the basis of the volatility of the volatility of the underlying assets. The decision making aid is used in the form of standard deviation of returns.
- Other Orders
Besides the above three common categories, there are certain other types of orders that are less commonly used like
- Fill or Kill
- All or None
- One Cancels The Others
- Market If Triggered Order (MIT)
- Stop Limit
- Good Till Cancel
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