For updates visit

How to Limit market losses

Saturday, June 23, 2007

There is special option called `stop loss order'. As the term suggests, it aims at minimising the loss in any trade and is typically used when the market goes into reverse gear. This allows a buy or a sell only after a threshold price (called the trigger price) is reached or crossed.

Stop loss order

There can be a market or limit order within this option. For instance, a stop market order to buy is taken as a market order when the stop price or a price above is reached. An order to sell gets triggered if the stop price or price below is touched. The risk associated with this order is that there may be lot of other prior orders in queue and the actual transaction may take place quite away from the stop loss price and may not really serve the purpose.

A stop limit order helps overcome this uncertainty. This order gives the investor the advantage of specifying the limit price — the maximum price at which he is willing to buy or the minimum price at which he is willing to sell. Thus, the order gets executed only if a price that is above (in case of a sell) or below (in case of a buy) the limit price is available.

Time limit of orders

If you want an order executed immediately, it can be done through the immediate or cancel (IOC) option. Such an order is partly or fully executed once you order, or cancelled immediately. If you would like to give some time for your order to be executed, a Good Till Days/Date (GTD) option is available.

This allows you to specify the number of days or the date till which the order should stay open for execution. The order is automatically cancelled and needs to be renewed if the order is yet to be executed. An extension of the above option is a Good Till Cancelled (GTC) order, which remains live until the order is executed or cancelled. However, these orders are also not open indefinitely; they expire at the end of settlement of the particular stock exchange. Investors need to check if they can use a GTD or a GTC order in conjunction with limit orders as they run the risk of market volatility by keeping the order open. Understanding and forecasting market moves is also imperative while opting for the above mentioned options.

Day order

An order that dies if unexecuted at the end of a trading day is a Day Order. Unless opted otherwise, orders are normally taken to be day orders. Some brokerage houses allow clients to place an order after market hours. Called After Market Orders (AMO), they are sent to the exchange on the opening of the next trading day. One needs to be careful while executing an AMO as a market order, as it may get executed at a freak price on the opening of the next trading day. Hence, it may be prudent to place an AMO limit order wherein you have a check over the price of the order. However, check out the price band (more or less than the last closing price) within which you are allowed to place such an order.

Posted by FR at 10:54 PM  

0 comments:

Post a Comment

IMPORTANT DISCLAIMER

Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.