Market Orders, Limit Orders, and Stop Orders – All Types of Orders Explained in Simple Words

In this article, we’ll explore an important topic in stock trading: the different types of orders you can place in the stock market. The order pages of various brokers often present many options, which can be confusing. This article will help you understand limit orders, market orders and stop orders, so you can make more informed decisions when buying or selling stocks or any type of financial instrument in the financial markets. So, Let’s get started!

A Simple Analogy to Understand Market Order, Limit Order, & Stop Order

Let’s say you are out to buy some apples. There could be three possible scenarios:

1. You want to buy apples only if the price is 100 rs per kg or less – This is like a limit order. You have a fixed price in mind and will only buy if the apples cost 100 rs or less. If the price goes higher, you won’t buy.
2. You are willing to buy apples at any price – This is like a market order. You don’t care about the price; you just want to buy apples immediately, no matter what they cost.
3. You want to buy apples only if the price goes above 100 rs per kg – This works like a buy stop order. You believe that if the price exceeds 100 rs, it shows strong demand, and you think it might go even higher, so you want to buy once the price reaches 100 rs or more.

Now, suppose you are a seller. You have to sell apples, and again, there are three possible scenarios:

1. You want to sell your apples only if the price reaches 120 rs per kg – This is a limit order. You have set a specific price and will only sell your apples when the price hits 120 rs or more.
2. You are willing to sell apples at any price – This is a market order. You don’t care about the current price; you just want to sell immediately at whatever price the market offers.
3. You want to sell your apples only if the price drops below 110 rs per kg – This is a stop-loss order. You’re waiting for the price to fall below 110 rs to sell because you think the price might keep dropping, and you want to sell before it goes even lower.

What is a limit order?

• A limit order allows you to set a specific price at which you want to buy or sell a stock.
• If you’re buying, you set a maximum price you’re willing to pay.
• If you’re selling, you set a minimum price you’re willing to accept.

Analogy:

• If you want to buy apples only if the price is 100 rs per kg or less, that’s a buy limit order. You won’t buy the apples if the price goes above 100 rs.
• If you want to sell apples only if the price is 120 rs per kg or more, that’s a sell limit order. You won’t sell unless the price reaches at least 120 rs.

Pros:

• You have control over the price at which you buy or sell.

Cons:

• There’s a chance that your order may not execute if the stock price doesn’t hit your limit.

What is a market order?

• A market order is executed immediately at the current market price, regardless of what that price is. You prioritize speed over price.

Analogy:

• If you want to buy apples at any price as long as you can get them right now, that’s a market order. You don’t care whether the price is 90 rs or 110 rs, you just want to buy right away.
• If you want to sell apples immediately at whatever price the market offers, that’s a sell market order. You’ll take the best available offer, even if it’s not what you ideally wanted.

Pros:

• It executes quickly, ensuring you get in or out of a trade without delay.

Cons:

• The final price may be different from what you expected, especially in a fast-moving market. Your order could be executed at 110 Rs too.

What is a stop order?

• A stop order (or stop-loss order) turns into a market order once a specified “stop” price is hit. There are two types: buy stop order and sell stop order.

Buy Stop Order:

• A buy stop order is placed above the current market price. You use it when you want to buy a stock only after its price rises to a certain level, believing it will keep going up.

Analogy:

• If apples are currently priced at 90 rs per kg, and you believe the price will keep rising if it crosses 100 rs, you might place a buy stop order at 100 rs. This means you will only buy the apples if the price hits or exceeds 100 rs.

Sell Stop Order:

This type of order can be used in two situation. One, if you are short selling a stock , second, If you want to protect your long positiom from losses happening because of a declining price which is called a stop loss order.

• A sell stop order is placed below the current market price. It’s used to prevent further losses if the price drops too much. Once the price hits the stop level, it triggers a market order to sell the stock.

Analogy:

• If you own apples and want to sell them if the price drops below 110 rs per kg, you place a sell stop order at 110 rs. When the price hits 110 rs or lower, it triggers a sale to avoid further loss in case the price continues to fall.

Stop-Loss Limit Order

What It Is:
This is a combination of a stop-loss order and a limit order. It sells the stock when it hits a stop price but only at a limit price you specify.

How It Works:

• Stop Price: The price at which the order becomes active.
• Limit Price: The minimum price you’re willing to accept once the order is active.

Pros:

• Gives you more control over the price at which you sell.

Cons:

• If the stock price falls rapidly below your limit price, the order might not be executed.

Also Read – What is Dividend? – Complete Guide in Simple Words

Cover Order

What It Is:
A cover order is a disciplined type of order that includes both a buy price and a stop-loss price. It’s designed to help traders manage their risk.

How It Works:

• You set a buy price and a stop-loss price at the same time.
• If the stock price falls to your stop-loss price, the order will be executed to limit your losses.

Pros:

• Helps manage risk with predefined stop-loss levels.

Cons:

• More suitable for short-term traders rather than long-term investors.

One Cancels the Other (OCO) Order

What It Is:
An OCO order allows you to set both a target price and a stop-loss price. If one order is executed, the other is automatically canceled.

How It Works:

• Target Price: The price at which you want to sell for profit.
• Stop-Loss Price: The price at which you want to sell to limit losses.
• If the stock hits the target price, the stop-loss order is canceled. If it hits the stop-loss price, the target price order is canceled.

Pros:

• Automatically manages both profit-taking and risk control.

Cons:

• Requires careful planning to set both target and stop-loss prices effectively.

After-Market Order (AMO)

What It Is:
An after-market order lets you place trades outside regular trading hours, usually after 3:30 PM, for execution in the next trading session.

How It Works:

• Allows you to set trades for after the market closes.

Pros:

• Provides flexibility to trade beyond regular hours.

Cons:

• Less liquidity can mean wider spreads and potentially less favorable execution.

Conclusion

Understanding these different types of orders can make a big difference in how you trade in the stock market. Whether you want to execute trades quickly with a market order, control your price with a limit order, or manage risks with stop-loss orders, knowing your options will help you trade more effectively. If you have any questions or need more details, just let me know! Happy trading!