Order types

The last chapter left you with a choice hiding inside every order. You can take the best price the market is offering this instant, or you can name your own price and wait for the market to come to you. That choice is the order type, and getting it right is the difference between control and an unpleasant surprise. Three types cover almost everything a beginner needs.

The market order: speed first

A market order says: buy or sell right now, at the best price currently available. It prizes speed and certainty of execution over price. Place one and you will almost always be filled within moments, but at whatever the market happens to be at that moment, which may differ a little from the last number you saw. A market order is the right tool for a large, heavily traded stock, where the spread is a paisa or two and you simply want to get in or out without fuss.

The limit order: price first

A limit order says: buy or sell only at a price I name, or better. A buy limit at five hundred rupees means buy at five hundred or less, never more. A sell limit at five hundred means sell at five hundred or more, never less. You gain full control over the price, but you give up the guarantee of being filled. If the market never reaches your price, your order simply waits in the book, and it may never execute. A limit order suits you when you have a price in mind and can afford to wait, and it is the safer choice in a thinly traded stock, where a market order might fill at an ugly price.

The stop-loss order: a safety net set in advance

A stop-loss order is different in spirit. It sits dormant until the price touches a trigger you set, and only then springs to life, usually to sell and cap a loss. Suppose you buy a stock at five hundred rupees and set a stop-loss to sell if the price falls to four hundred and seventy. As long as the stock holds above 470, nothing happens. If it drops to 470, the stop-loss activates and sells, ending the trade with a loss of about thirty rupees a share rather than letting it fall further. It is a decision you make calmly in advance, so a falling market does not force you to decide in a panic. Once triggered, a stop-loss becomes an ordinary order, taking either the best available price or a limit you attached to it.

In short: reach for a market order when speed matters and the stock is liquid, a limit order when price matters and you can wait, and a stop-loss whenever you want a pre-set exit in case the trade goes against you.

What to carry forward

Three order types carry a beginner a long way. The market order values speed and near-certain execution, at whatever price is going. The limit order values price, at the cost of maybe never filling. The stop-loss is your calm, pre-set exit, a seatbelt that limits a loss without promising a perfect result. Choosing among them is really a choice about what you care most about in a given trade: getting done, getting your price, or protecting yourself.

You now know how to place an order and how to shape it. A fair question follows: who is on the other side of it? The next chapter looks at the people and machines you are trading with.