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Types of Market Transactions

Types of Market Transactions



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Published by: vinayjain221 on Sep 12, 2008
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Types Of Market Transactions
One prerequisite to successful investing in shares is a basic understanding of the operationalmechanics of the secondary market. Before a share is purchased or sold, the investor mustinstruct 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 orderscan be further classified as either selling long or selling short. Various types of orders that you canput through to exchanges are as follows:
Buy Orders
Buy orders, obviously are used when the investor anticipates a rise in prices. When he deems thetime appropriate for the share purchase, the investor enters a buy order. As explained in nextpages, the investor must take several other determinations besides just instructing his broker tobuy some stock.
Sell Orders
Sell – Long Orders
When the investor determines that a stock he already owns (i.e. long position) is going toexperience a decline in price, he may decide to dispose of it. Here also, other determinationsmust be made to accompany sell order.
Sell-Short Orders
Short selling, or "going short," is a special and quite speculative variety of selling. Basically itinvolves selling shares of a stock that are not owned in the anticipation of a price decline. Theshort 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 betweenthe sale price and the purchased price. However, short selling can be very dangerous since everyrise 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 isneutralised. In the case of a buy into a stock at least the investor acquires stake in the companywhose 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 andcompany performances on a daily basis.
Price Limit Orders
Market Order Limit OrdersUse Of Market and limit Order An investor can have his order executed either at the best prevailing price on the exchange or at apre-determined price.
Market Order 
Investors, who want to buy or sell the share regardless of price on that day. They are executed asfast as possible at the best prevailing price on the exchange. It means that your order quantity willbe executed the moment it reaches the exchange provided the required quantity is available. Thisorder 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. Thedisadvantage 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 veryvolatile securities.
Limit orders
Limit type orders refer to a buy or sell order with a limit price. Limit orders overcome thedisadvantage of the market order-namely, not knowing in advance the price at which thetransaction will take place. It means that if the order gets executed, them it will within the limitspecified or at a better rate than that. This order type is accepted by both the exchanges i.e. BSEand NSE.When using a limit order, the investor specifies in advance the limit price at which he wants thetransaction 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 hewill pay for the share; the order can be carried out only at the limit price or lower. In the case of alimit 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 youwould want your order to execute. Generally, limit orders are placed "away from the market." Thismeans that the limit price is somewhat removed from the prevailing price (generally, above theprevailing price in the case of a limit order to sell, and below the prevailing price in the case of alimit order to buy). Obviously, the investor operating in this manner believes that his limit price willbe 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 closeto the prevailing price, there is little advantage over the market order. Moreover, if the limit isconsiderably removed from the market, the price may never reach the limit – even because of afractional difference. Also because limit orders are filled on a first come first basis, it is possiblethat 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 placesthe order and it will not be even possible to cancel the order. However, a limit order may becancelled or modified at any time prior to execution.
Time Limit of Orders
Day Orders or End of Day OrdersGood 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. Orderscan 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. Unlessotherwise requested by the investor, all orders are treated as day orders only. Market orders arealmost day orders because they do not specify a particular price. One key rationale for the dayorder is that market conditions might change overnight, and thus a seemingly good investmentdecision 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 thisorder if it is not traded within a number of days, which is parameterized by the Exchange. In thecase 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, andtherefore feels sufficiently confident that, given enough time, the order will be executed at the limitprice.
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 onwhich the order is placed and inclusive of holidays. Such orders are automatically cancelled at theend of settlement in case strike-price is not reached during the tenure of settlement in which theorder was placed. The investor would then have to refresh the order with his broker, in thesubsequent 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 ispossible 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 theseorders may be desired.
Stop Loss Order  
Stop Loss Market OrdersStop Loss Limit OrdersA stop loss order allows investor to place an order which gets activated only when the last tradedprice of the share is reached or crosses a predefined threshold price also called as trigger price. Itmeans that if investor feels that any particular share will be worth buy or sell only after it crossessome 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 tooclose to the market, the investor might have his position closed out because of a minor pricefluctuation, even though his idea will prove correct in the long run. On the order hand, if the stop istoo 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 andapplication. A stop market order to sell is treated as a market order when the stop price or a pricebelow is "touched" (reached); a stop market order to buy is treated as a market order when thestop price or a price above it is reached. Thus, stop market order to sell is set at a price below thecurrent 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 becomemarket orders after the proper price level has been reached, the actual transaction could takeplace some distance away from the price the investor had in mind when he placed the order. Thereason 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 marketorder. The stop limit order gives the investor the advantage of specifying the limit price: themaximum 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 isreached, and then an attempt is made to buy at the limit price or lower. Conversely, a stop limitorder to sell is activated as soon as the stop price or lower is reached, and then an attempt ismade to sell at the limit price or higher.The obvious danger is that the order may not be executed in a volatile market because thedifference between execution limit and stop price may be too low. However, if things work out asplanned, the stop limit order to sell will be very effective.

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