Trading orders can be broadly classified into two groups – Time Condition based classification and Price Condition based classification. Below, we are showing the basic types. Order types can be various combinations of the types mentioned.
1. Day Order
A Day Order is valid until the end of the trading session of the day in which the order was placed.
2. Immediate or Cancel (IOC)
As the name suggests, an IOC order expires if it could not be placed fulfilled immediately.
3. Valid Till Cancelled (VTC)
A Valid Till Cancel or a Good Till Cancel order remains active till it is fulfilled or cancelled by the trader.
Before we discuss the order, let us take some time to introduce the concept of Bid and Ask price quotations.
A Bid price is a maximum price a buyer is willing to pay for a security.
An Ask price is the minimum price at which a seller is willing to sell a security.
So, an order is executed when the Bid price of the buyer matches the Ask price of the seller. Buyers are sellers do not directly deal with each other but with the market makers who buy securities from the sellers and sell securities to the buyers. Market makers can only make a profit when the price at which they buy the securities is lower than the price at which they sell. That is why the Ask price is higher than the Bid price for the same security. The difference between the best Ask price and best Bid price is called the Bid-Ask spread. The spread is generally dependent on the liquidity and volatility of the security. The spread tend to increase with lower liquidity and higher volatility.
Now, let us see some order types.
1. Limit Order
Limit Order is based on the prices specified by the traders. So, a limit buy order is only executed when the market ask price is equal to or lower than the limit price and a limit sell order is only fulfilled when the market bid price is equal to or higher than the limit price.
2. Market Order
A market order is fulfilled at the best possible price (market ask price for a buy order and market bid price for a sell order) when the order is placed. The trader does not need to specify any price.
3. Stop-Loss Order
Stop-Loss is a mechanism of triggering a market or limit order based on the price of a security. Consider, that you bought a security at Rs. 150 and expected that the price will go up. But, the price started going down. Now, you created a Stop-Loss sell order which triggers a market sell order when the market price reaches Rs. 100 and the security is sold at the best available market price.