Placing an order looks simple on a phone screen, yet a surprising number of beginners lose money not because they chose the wrong company but because they chose the wrong order type. Whether you use one of the many Trading Apps available today or a desktop terminal, the order ticket is where your decision turns into a real transaction. The securities you buy are credited to your Demat holding after settlement, so a mistake at the ticket stage cannot easily be undone. Understanding how orders work, how protective instructions function and how to read the buyers and sellers queued on the screen will make your investing calmer and more precise.
Market Orders and Limit Orders
A market order is an order to buy or sell immediately at the best available price. It is executed instantly but may be at a worse price than expected, particularly in thin stocks.
A limit order is an order to sell or buy at a specific price. A buy limit order would be executed at the limit price or lower, and a sell limit order would be executed only at the limit price or higher. The disadvantage is that the order may not be executed at all. Limit orders are generally better for small-time traders since they allow one to set fair price bounds in mind without the surprise of unexpected slippage. The discipline to set a reasonable price for selling or buying is necessary and is a lesson in patience that the new trader is likely to learn.
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Stop-loss Orders and Lowering Exposure to Downside Risk
A stop-loss is a special order to sell with a pre-set trigger price below the current buy price. It is a useful tool for limiting losses on a stock that has gone against the trader, and setting the trigger price lower than the buy price by some percentage is a smart move in setting a stop-loss.
There are two types of stop-loss orders: the stop-loss market order and the stop-loss limit order. The former is executed as a market order once the trigger price is reached, ensuring that some shares are sold, but at a possibly substantially worse price. The latter has a limit price set, ensuring that the sale is made at a satisfactory price. However, if the stock price gaps below the trigger price, the trade may not be executed. In overnight gaps, the stop-loss price may be substantially worse than expected. A stop-loss order is thus a useful tool but should be set reasonably taking into account the likely range of the stock price, since it is not a foolproof mechanism against losses.
Ascertaining Market Depth
The market depth represents the quantity of shares at various levels of the best bid and ask prices, usually the top five. The buy side has the number of shares at various prices that the market participants are willing to buy, and the sell side has the number of shares at various prices that the market participants are willing to sell. The higher the distance between the highest bid and lowest ask on either side, the more thinly traded the stock is, and thus the more expensive it is to trade as the liquidity providers take a larger cut.
Ascertaining liquidity in terms of quantity on either side is a useful exercise to determine the possible short-term moves in the stock, but such estimates can fluctuate rapidly since large orders can be cancelled instantly. One should look at the market depth to determine the reasonable spread for the entry and exit prices. For long-term investors, the primary use of the market depth is in setting the target price for a limit order and to avoid illiquid penny stocks that cannot be exited quickly.
Delivery, Intraday and Settlement Basics
When the order is placed for delivery, it means that the shares would be moved to the delivery wallet upon settlement, and the ownership is transferred to the buyer. The intraday orders have to be squared off or they get auto-squared off by the system at the closing price, which would typically have a higher brokerage. Intraday trading involves margin money and is more volatile, and should be done only by experienced traders and investors who understand the risks and rewards.
One should always check the order ticket to ensure that it is a delivery order if that is the intention. Choosing the wrong type of order is a common rookie error that results in either auto-squared off intraday orders or higher brokerage on the delivery orders. Check the order confirmation and trade book to ensure that the order is squared off or moved to the delivery wallet.
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Practical Execution Tips
Do not place orders right at the open of the market when prices are volatile. Always double-check the quantity and price before confirmation of the order. Do not place large orders when learning to trade. Keep a simple note about the price and quantity of the order as a beginner to ensure that no mistakes are made. Most importantly, have the target buy and sell prices in mind before placing the order.