Types Of Market Transactions

One prerequisite to successful investing in shares is a basic understanding of the operational mechanics of the secondary market. Before a share is purchased or sold, the investor must instruct his broker about the order. This means clearly specifying how the order is to be placed. Much confusion and ill will can be avoided if proper instructions are sent to the broker.
Basically, two types of share transaction exist-buy orders and sell orders. Technically sell orders can be further classified as either selling long or selling short. Various types of orders that you can put through to exchanges are as follows:

Buy Orders
Buy orders, obviously are used when the investor anticipates a rise in prices. When he deems the time appropriate for the share purchase, the investor enters a buy order. As explained in next pages, the investor must take several other determinations besides just instructing his broker to buy some stock.
Sell Orders

Sell – Long Orders

Sell-Short Orders


Sell – Long Orders
When the investor determines that a stock he already owns (i.e. long position) is going to experience a decline in price, he may decide to dispose of it. Here also, other determinations must be made to accompany sell order.

Sell-Short Orders
Short selling, or "going short," is a special and quite speculative variety of selling. Basically it involves selling shares of a stock that are not owned in the anticipation of a price decline. The short seller sells a stock in the first leg of transaction which is neutralised by eventual purchase of sold position at a lower market price. The short seller makes profit/loss by the difference between the sale price and the purchased price. However, short selling can be very dangerous since every rise in price of stock would add to losses of the short-seller, the stock may never reach the lower price(the price of short sell) for a long time and booking losses would be the only solution for short-seller. Sell-short transaction, by its very nature leads to unlimited losses till the transaction is neutralised. In the case of a buy into a stock at least the investor acquires stake in the company whose performance may eventually get reflected in the share price and provide exit to the buyer. Sell-short transactions are hence executed by experienced participants who follow markets and company performances on a daily basis.

Price Limit Orders

Market Order

Limit Orders

Use Of Market and limit Order


An investor can have his order executed either at the best prevailing price on the exchange or at a pre-determined price.

Market Order

Investors, who want to buy or sell the share regardless of price on that day. They are executed as fast as possible at the best prevailing price on the exchange. It means that your order quantity will be executed the moment it reaches the exchange provided the required quantity is available. This order type is accepted by both the exchanges i.e. BSE and NSE.
The obvious advantage of a market order is the speed with which it is executed. The disadvantage is that the investor does not know the exact execution price until after the execution. This advantage is potentially most troublesome when dealing in either very inactive or very volatile securities.

Limit orders
Limit type orders refer to a buy or sell order with a limit price. Limit orders overcome the disadvantage of the market order-namely, not knowing in advance the price at which the transaction will take place. It means that if the order gets executed, them it will within the limit specified or at a better rate than that. This order type is accepted by both the exchanges i.e. BSE and NSE.
When using a limit order, the investor specifies in advance the limit price at which he wants the transaction to be carried out. It is always understood that the price limitation includes an "or better" instruction. In the case of a limit order to buy, the investor specifies the maximum price he will pay for the share; the order can be carried out only at the limit price or lower. In the case of a limit order to sell, the investor specifies the minimum price he will accept for the share; the order can be carried out only at the limit price or higher.

Use of Market and limit order

To safe guard against extreme volatility in the markets, you can put a limit on what price you would want your order to execute. Generally, limit orders are placed "away from the market." This means that the limit price is somewhat removed from the prevailing price (generally, above the prevailing price in the case of a limit order to sell, and below the prevailing price in the case of a limit order to buy). Obviously, the investor operating in this manner believes that his limit price will be reached and executed in a reasonable period of time. Therein, however, lies the chief disadvantage of a limit order-i.e. it may never be executed at all. If the limit price is set very close to the prevailing price, there is little advantage over the market order. Moreover, if the limit is considerably removed from the market, the price may never reach the limit – even because of a fractional difference. Also because limit orders are filled on a first come first basis, it is possible that so many of them are in ahead of the investor’s limit at a given price that his order will never be executed. Thus, selecting a proper limit price is a delicate maneuver.
On the other hand a market order is filled at the best possible price as soon as an investor places the order and it will not be even possible to cancel the order. However, a limit order may be cancelled or modified at any time prior to execution.

Time Limit of Orders
Day Orders or End of Day Orders

Good Till Cancel Order

Good Till Date Order

Immediate or Cancel Order


So far orders have been classified by type of transaction (buy or sell) and by price (market or limit). Now differences stemming from the time limit placed on the order will be examined. Orders can be for either a day or until canceled.

Day Orders or End of Day Orders
A day order is one that remains active only for the normal trading time on that day. Unless otherwise requested by the investor, all orders are treated as day orders only. Market orders are almost day orders because they do not specify a particular price. One key rationale for the day order is that market conditions might change overnight, and thus a seemingly good investment decision one day might seem considerably less desirable the following day.

Good Till Cancel Order
A Good Till Cancelled (GTC) order remains in the system until they are executed or cancelled. These types of orders are used in conjunction with limit orders. However, the system cancels this order if it is not traded within a number of days, which is parameterized by the Exchange. In the case of BSE and NSE, such order expires at the end of settlement in which it was placed.
When using a GTC order, the investor is implying that he understands the market mechanics, and therefore feels sufficiently confident that, given enough time, the order will be executed at the limit price.
Good Till Date Order
A Good Till Days/Date (GTD) order allows you to specify the number of days/date till which the order should stay in the system if not executed. The days counted are inclusive of the day/date on which the order is placed and inclusive of holidays. Such orders are automatically cancelled at the end of settlement in case strike-price is not reached during the tenure of settlement in which the order was placed. The investor would then have to refresh the order with his broker, in the subsequent new settlement.

Immediate or Cancel Order
An Immediate or Cancel (IOC) order allows the user to buy or sell a security as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order and the unmatched portion of the order is cancelled immediately.
NSE uses the same terminology while BSE calls it Hit BUY/SELL.

Special Types of Orders
Stop Loss Order

Disclosed Quantity (DQ) order (both for BSE & NSE)


This section tries to discuss several key varieties of orders and several situations in which these orders may be desired.

Stop Loss Order
Stop Loss Market Orders

Stop Loss Limit Orders


A stop loss order allows investor to place an order which gets activated only when the last traded price of the share is reached or crosses a predefined threshold price also called as trigger price. It means that if investor feels that any particular share will be worth buy or sell only after it crosses some threshold rate then this type of order gets activated.
Several possible dangers are inherent when using this type of order. First, if the stop is placed too close to the market, the investor might have his position closed out because of a minor price fluctuation, even though his idea will prove correct in the long run. On the order hand, if the stop is too far away from the market, the stop order serves no purpose.
Further classification of this type of orders can be defined depending upon the price limit of orders, i.e. the price on which the order should execute, as explained under:
Stop Loss Market Orders
A stop order is a special type of limit order but with very important differences in intent and application. A stop market order to sell is treated as a market order when the stop price or a price below is "touched" (reached); a stop market order to buy is treated as a market order when the stop price or a price above it is reached. Thus, stop market order to sell is set at a price below the current market price, and a stop order to buy is set at a price above the current market price.
The possible inherent danger associated with this type of order is that because they become market orders after the proper price level has been reached, the actual transaction could take place some distance away from the price the investor had in mind when he placed the order. The reason may be prior queuing up of other orders or order quantity not available.
Stop Loss Limit Orders
The stop limit order is a device to overcome the uncertainties connected with a stop market order – namely that of not knowing what the execution price will be after the order becomes a market order. The stop limit order gives the investor the advantage of specifying the limit price: the maximum price on which the buy order should filled or minimum price on which the sell order should filled. Therefore, a stop limit order to buy is activated as soon as the stop price or higher is reached, and then an attempt is made to buy at the limit price or lower. Conversely, a stop limit order to sell is activated as soon as the stop price or lower is reached, and then an attempt is made to sell at the limit price or higher.
The obvious danger is that the order may not be executed in a volatile market because the difference between execution limit and stop price may be too low. However, if things work out as planned, the stop limit order to sell will be very effective.

Disclosed Quantity (DQ) order
The system provides a facility for entering orders with quantity conditions: DQ order allows you to disclose only a part of the order quantity to the market.

Price Bands
Also known as circuit filters or circuit breakers, price bands set the upper and lower limit within which a stock can fluctuate on any given day. A price band for the day is a function of previous trading day’s closing.
Currently the both BSE and NSE has fixed price bands for different securities within which they can move within a day.
Pursuant to a SEBI directive effective from July 03, 2000 the Exchanges decided that the price bands in respect of all the securities shall be relaxed by 8% after the security has touched the initial price band of 8%.
However, for securities traded at or above Rs.10 and below Rs.20 will have daily price band of +/-25% without any settlement / weekly price band and for securities traded below Rs.10/- will have daily price band of +/- 50% without any other settlement price band.
The utility of price bands is that they are supposed to prevent extreme price movements, thus reducing the scope of price manipulation. In a way price bands do slow things down and make it that much harder for operators wanting to quickly manipulate prices in huge leaps. When there is general euphoria or panic in the market that seems fundamentally unwarranted, price bands give wary investors the benefit of a cooling period.
Operators with access to large funds, shares and time at their disposal, however can manipulate the price bands to their advantage by blocking exit/entry of other investors from a particular counter by placing huge orders. For example when a stock touches the lower circuit in a sharp downtrend, ordinary buyers would wait for the next trading session believing that the stock will be available at a still lower price. As a result, investors wanting to sell the stock won’t find buyers at the lower circuit price but would have to offload at a much lower price due to the volume-led manipulation executed by operator. The operator would thus be able to batter the stock down by a large gap created by his own sell orders. Much larger volume of the battered stock(than that used to create a sell panic) would then be accumulated by the same operator at a much lower price as panic-stricken ordinary investors would happily exit the stock. Some of the stocks which have been used by operators in recent times for manipulating the markets are Himachal Futuristic Communications, Zee Telefilms, DSQ Software, Pentamdia Graphics, Silverline Technologies, etc.+

Source: hdfcsec.com