Trading of financial instruments like stocks, bonds, currencies, commodities and futures have become more complex than just buying and selling. As the needs of traders diversified over the period and new financial instruments and execution procedures introduced, the need of different kinds of order executions and transactions become a necessity. So brokers and trading firms started to introduce different kinds of order types.
What are Orders?
Orders are instructions from the trader to the broker to do a transaction. It can be a buy order or sell order. They can be placed on phone or online through the trading platform. These are of different types enabling the trader to place restrictions for execution depending on price and time. The order execution involves a fee; which is charged by the brokerage firm. The fee can be flat or percentage or can be spread differences of ask and bid prices. The types available for a trader depends upon the brokerage firm, his/her account type and financial instrument. Below are some of the most popular types of trading orders offered by stock and forex brokers.
Market Orders: These are the simplest types of orders which tell the brokerage firm to enter or exit a trade at the available market price. The basic purpose is to carryout a trade. These are offered by all brokers and are the default order type on most of the trading platforms. While they offer fast trade executions they do not offer any additional benefits or tools to the trader.
Limit Orders: These are intrustions to buy or sell a stock, currency or commodity at a specified price or better price. Limit sell orders tell the broker to sell the instrument owned at a specified price or higher price. Similarly limit buy orders tell the broker to buy an instrument at a specified price or lower price. Thus the trader can get better trade executions, but many times the orders simply expire without any execution because the price may not touch the specified level at all.
Day Orders: These are time-bound orders which should be executed within the trading day or are cancelled automatically at the end of trading day. Many brokerage firms consider all trading orders as day orders unless the time-period is specified. Many trading systems also support short-life day orders with lifespan of a few minutes to hours.
Short Selling Orders: They are basically sell intrucions of financial instruments which the trader not actually own. The selling is effected through borrowing the instrument from the broker. Not all brokers and financial instrument have short-selling facility. And, short-selling require a margin account with the broker.
Stop Orders: These are one of the most popular order types which are used as stop-losses for limiting the trading risks. These tell the broker to execute the trade when the price reaches a specified level. On reaching the level they executed either as market or limit order. A sell intrucion for a long position is executed when the price drops to a specified level. Similarly a buy order for short position is executed when the price rises to a specified level. Many brokers also offer trailing stop orders which dynamically follow price trends, but are executed on reversal of trend by locking the profit.
Fill or Kill (FOK) Orders: These are placed for full execution or no execution. These orders do not allow any partial executions. If the execution is not done; the they are automatically cancelled.
Good Till Cancelled (GTC) Orders: These remain active until they are executed. But most brokers have a specified date period after which the they are cancelled automatically. There are also Good Till Date orders available which remain active until a specified date.
One Cancels the Other Order: These are intrucions for more than one number of trades placed simultaneously. When one of the orders is executed on meeting of specifications others are cancelled automatically.
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