The stock market is ruling close to its all-time high. While experts predict volatile times ahead, investors waiting on side-lines are ready to buy stocks of their choice at attractive prices. But it is easier said than done.
On one hand, the market volatility is unnerving and on the other hand, investors may find it difficult to keep track of prices through the day. However, using the order placing facilities provided by stock-brokers, investors can get the right stocks at the right prices.
Let’s say you want to buy a small cap stock which may not be liquid. If the broader market tanks, market participants can trample such stocks. Investors can take advantage of such a situation by using ‘limit orders’.
How ‘Limit Order’ works
Limit orders can be placed to buy or sell a particular stock at a particular price. For example, the current share price of X stock is at Rs 150. But you want to buy it only if it touches Rs 120. In that case you can place a ‘limit order’ clearly specifying that the quantity and price. The order gets triggered if and only if the stock quotes at a price mentioned by you.
“A limit order is an order which allows you to buy or sell a security at a predefined price or a price that is set by you,” Vineet Patawari Co-founder & CEO, Stockedge and Elearnmarkets said.
Limit order is of two types. ‘Good till Day’ (GTD) and ‘Good till Cancelled’ (GTC). While the former gets removed from the system at the end of the day, later stays in the system and submitted to the exchange by the broker everyday till it gets cancelled by the investor or till it gets executed. Some brokers allow the investors to define the time for which such GTC orders are valid. When you have a large quantity of shares to transact at a specified price, then limit orders especially come in handy. You can specify the quantity you want to trade and the quantity you want to disclose.
The disclosed quantity is generally a minimum of 10% of the quantity you want to trade. There are situations when you do not want to disclose large quantities you want to trade (especially in case of small cap stocks), as the bidders or sellers may change their offers. This feature helps.
Using market orders
Market orders are the other extreme of the limit order. Market orders allow you to simply buy desired quantities of securities at market price. These are useful when you know the price is just right and adequate quantity of shares by bidders or sellers of the stock to transact desired quantity.
“A market order is an order to buy or sell a security at the best possible price in the current market. Once the order to buy or sell is entered, the system will execute it with the best prices available in the market. Market orders are the simplest type of orders, and get executed almost immediately. However, though there is execution certainty they do not provide price certainty. A buy market order will be executed at the lowest ask price in the order book, whereas a sell market order will be executed at the highest bid price in the order-book of the security at that particular time,” Patawari pointed out.
Need to adopt caution
There are no additional costs or charges you have to pay to use these orders. Though these orders are meant for empowering the investors, investors have to be careful while using them. “Limit orders execute at favorable prices but there is a chance that a limit order may not be executed at all. A limit order is not filled if a stock does not reach the limit price set by us. A careful choice between the limit and the market order has to be made by the investor according to the need,” Patawari said.
Do not forget to track your order if you are using ‘GTC orders’. What looks attractive today may not remain so enticing a few days later. You have to keep reviewing such ‘live’ orders to avoid rude shocks.
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