The Hindu Business Line : Pricing your order

Are you one of those enthusiastic young investors who has a demat and share-broking account in place and is itching for action. A number of questions may linger in your mind when you execute your first transaction. More so when it is online, since you do not have the advantage of the human interaction while transacting.

You will come across various terms such as market orders, limit orders, stop loss orders and so on when you buy or sell a share.

Market order

When you wish to buy or sell a stock on a day, regardless of the prevailing price then, market order would be your choice. Market orders are done not only at the best prevailing price on the exchange but executed immediately provided you have entered the required quantity. The limitation is that an investor would know the exact transacted price only after the execution. This may be a worry when it comes to very volatile stocks.

Limit order

To safeguard your transaction against market volatility and overcome the limitation of a market order, you can put a limit on the price at which you want to buy or sell. Known as limit order, the transaction is carried out at a price, which is within the limit specified by you, or at a better rate. An investor needs to specify in advance the limit price or the price at which to buy or sell. The obvious advantage of this order is you can avoid buying or selling a stock at a price that is higher or lower than what you had initially set. In other words, in a buy transaction, you can set the maximum price you are willing to pay for a share. The order gets executed at that price or lower. Similarly in a sell order, an investor can specify the minimum price and the shares are sold at that price or higher.

Generally, a limit order price is placed away from the prevailing price. While an investor believes that his price will be reached, there is a risk of it never reaching the set limit. This means that the order may never be executed at all. Further, as limit orders are fulfilled on a first-come basis, there is a possibility of a long queue ahead of your limit order. There is also little advantage if your limit price is close to the existing market price; you might as well have executed a market order instead. Thus, zeroing in the limit price can be a tricky affair. A limit order can, however, be cancelled or modified anytime before its execution.

The above two orders primarily determine the price of your transactions which can be the best prevailing price (market order) or pre-determined price (limit order). There are orders such as day orders or good-till-cancelled orders that focus on the time-frame, which will be discussed in the coming weeks.

More Stories on : Investments | Stock Markets | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page