Placing an order, and order types
The answer
An order is an instruction with 3 parts: what, how many, and at what price. The price part is the only one you get to design, and it is the part most people leave on the default setting.
Why this costs you money
The default order type in most apps is a market order. A market order says "buy it now at whatever price is available". In a large, busy company that costs almost nothing. In anything else it is a blank instruction and the market fills it in for you.
Cluster 1 covers why that happens: the order book is a queue of prices, and a large market order eats through it level by level. This article is about the part you control, which is the instruction itself.
Here is the version that costs money without anybody noticing. A trader decides to buy a stock at 250. The stock opens at 258. They place a market order anyway, because they have already decided. They pay 259. The trade now starts 3.6% behind a plan that was built on 250.
That is not bad luck. It is a plan entered as the wrong instruction.
The second cost is the opposite mistake. A trader uses a limit order at exactly 250, the stock trades at 250.05 all day and never fills, and the move happens without them. The limit order was free of slippage and cost them the entire trade.
Both mistakes come from the same gap. People spend hours choosing what to buy and 2 seconds choosing how to buy it.
How it works
The journey. You tap buy. Here is what happens, in order.
- Your app packages the instruction and sends it to your broker's system.
- Your broker's risk system checks it. Do you have the money or the shares? Is the quantity within limits? Is the price within the day's permitted band? Most rejections happen here, in milliseconds, and the app shows you a reason.
- The exchange receives the order, stamps it with a time, and puts it in the order book at your price.
- The matching engine pairs it with an opposite order by price, then by time. You get a trade confirmation with an exchange order number.
- The clearing corporation takes over and the trade settles a day later.
Between step 1 and step 4, the elapsed time is usually a small fraction of a second. The important part is step 2: your broker can reject your order, and sometimes does, at a moment when you badly want it to go through.
The order types that matter.
| Type | You control | You are guaranteed | Use it when |
|---|---|---|---|
| Market | Nothing about price | It will fill | The stock is deeply traded and you must be in or out now |
| Limit | The worst price you accept | Nothing | Always, unless you have a specific reason not to |
| Stop-loss | A trigger price | Nothing until triggered | You want an exit to fire when you are not watching |
| Stop-loss limit | A trigger and a limit | Nothing | You want protection but refuse a terrible fill |
A stop-loss is a resting instruction. It sits inactive until the price reaches your trigger. Then it becomes a live order. If you set it as a stop-loss market order, it becomes a market order at the worst possible moment, which is exactly when the price is moving fast and the book is thin.
Validity. An order can be good for the day, or good until cancelled, or immediate-or-cancel. Day is the default in India for ordinary orders. Good till triggered facilities exist at Indian brokers as a broker-level feature, not an exchange feature, which means they depend on the broker's system running.
What it tells you, and what it does not
A filled order tells you what you paid. It does not tell you what you could have paid.
That is the missing measurement in almost every retail account. Your broker shows you the fill price. It does not show you the price when you pressed the button. The difference between those 2 numbers is your slippage, and until you measure it you do not know whether your order type is costing you anything.
An unfilled limit order also carries information that people discard. If your limit sat unfilled all day while the stock traded 5 paise above it, your price was not where the market was. That is worth knowing and it is free.
The decision rule
Limit orders by default. Market orders only when 3 conditions all hold.
- The spread is under about 0.5% of the price.
- The quantity showing at the best price is larger than your order.
- It is not the first 15 minutes or the last 5 minutes of the session.
If any 1 of the 3 fails, use a limit order. Set the limit slightly worse than the current price, not exactly at it, so that a 5 paise move does not cost you the trade.
And never use a stop-loss market order in an illiquid stock. Use a stop-loss limit, and accept that in a gap it may not protect you at all.
Try this now
Three minutes, and you will see your own order travel through the system. Nothing here risks money if you follow the steps.
- Pick a stock you already own or watch. Note its current price.
- Place a limit buy order at a price far below the current price — around 10% below. It will not execute. Use the smallest quantity allowed.
- Go to Orders, Order book or Open orders. Your order is sitting there. Open it and find the exchange order number and the exchange timestamp. That is the proof it reached the exchange and is in the queue.
- Now open the Market Depth or Level 2 window for that stock. Your order is somewhere in that buy column, at your price, behind everybody who got there earlier at the same price.
- Cancel the order.
- Now find a trade you actually executed in the past month. Open the trade details and compare the fill price against the price at the time you remember placing it. If your broker shows an order timestamp and a trade timestamp, compare those too.
What you should see. In step 3 the exchange order number is the moment your instruction stopped being your broker's and became the exchange's. Orders that never reach step 3 are rejected by your broker. Knowing the difference matters on a day when something fails.
In step 6, most readers find their market orders filled slightly worse than the last traded price they remember, and their limit orders filled at exactly the limit or better. If you have a trade where the fill was far from what you expected, look at the time. It is usually in the first minutes of the session.
Three real cases
1. Knight Capital Group, 1 August 2012 (United States) — orders are software, and software fails A faulty software deployment caused Knight Capital's systems to send millions of unintended orders into the market within about 45 minutes. The firm lost roughly $460 million and was sold soon afterwards. The SEC later brought an action over its market access controls. The lesson for a retail investor is that the pre-trade risk check at step 2 is not bureaucracy. It is the only thing between a bad instruction and the market.
2. The Flash Crash, 6 May 2010 (United States) — a market order has no floor Major US indices fell around 9% and recovered within minutes. During the worst minutes, some shares executed at a cent and others at absurd highs. The joint SEC and CFTC report described liquidity withdrawing while market orders kept executing against whatever remained. A market order does not fill at a fair price. It fills at an available one.
3. Freak trades in Indian index options — thin books inside liquid-looking instruments Indian markets have repeatedly seen momentary price spikes in options contracts, where a large market order met a nearly empty book and executed far from fair value. Exchanges have introduced price-protection mechanisms in response. These happen in instruments most people assume are deeply liquid, because liquidity is concentrated in a few strikes.
The question that resolves it
A novice placing an order asks: do I want to buy this?
An expert asks: what is the worst price at which I still want to buy this?
The second question has a number in it, and that number is the limit price. If you cannot produce it, you do not yet have a trade. You have an opinion.
What would make this wrong
If order type made no difference, then market and limit orders in the same stock at the same moment would produce the same average fill. Any trader who has compared their own fills in a small company knows they do not.
Two honest limits.
For a long-term investor buying once and holding for years, this whole article is worth a few paise. The correct amount of attention to pay is small. Use a limit order, place it a little away from the current price, and stop thinking about it.
And limit orders are not free. Their cost is the trade you did not get, and that cost is invisible because it never appears in your account. A trader who misses 3 moves a year saving 0.2% on the ones they catch has made the wrong trade-off and cannot see it in any report.
In India
Cash equity trading runs from 9:15 to 15:30, with a pre-open session from 9:00 to 9:08 for order entry and matching.
Order features specific to India:
- After-market orders. Most brokers accept orders outside market hours and release them into the pre-open or the opening. A broker feature.
- Cover orders and bracket orders. Broker-level packages combining an entry with a compulsory stop. Availability changed after the margin reforms.
- Good till triggered. A broker-level standing instruction. It is not resting at the exchange, so it depends on the broker's system.
- Price bands. Every stock has a daily band. An order priced outside it is rejected at step 2, not left waiting.
- Freeze quantity. Orders above a per-security limit are rejected or held for confirmation. Article 8 covers this.
Since the peak margin rules were phased in between 1 December 2020 and 1 September 2021, the money for a trade must be available upfront rather than reconciled after the session closes.
In the United States
Regular trading runs from 9:30 to 16:00 Eastern time, with pre-market and after-hours sessions on either side. Those extended sessions have far less liquidity, wider spreads, and different order handling.
Two structural facts change what happens after you press the button.
Payment for order flow. Many retail brokers do not route your order to an exchange. They sell it to a wholesale market maker who fills it internally, often at a small improvement on the public quote. Your order never appears in a public book.
Regulation NMS. Trading venues may not execute at a price worse than the best displayed quote elsewhere, subject to exceptions. Your own protection comes from your broker's duty of best execution rather than that rule.
Two order features exist in the US that Indian retail investors do not have. Fractional shares let you specify an amount of money rather than a number of shares, though fractional orders often execute only at set times. And extended-hours trading is widely available, usually with limit orders only, which is the correct restriction.
Where they differ, and what that tells you
In India, your limit order goes into a public order book and sits in a visible queue. Price-time priority is the whole rule, and where you are in the queue is observable.
In the United States, a retail limit order may be routed to a wholesaler and never displayed anywhere. It can still be filled, and often at a better price than the public quote, but the queue you are in is not visible to you.
What that tells you is how much to trust the depth window.
An Indian trader can size an order against the visible book and be roughly right, because the visible book is most of the liquidity.
An American trader looking at a thin displayed book in a mid-sized company may still be filled easily, because the liquidity that matters is not displayed. The equivalent discipline is different: read your broker's published execution quality reports, and use limit orders in extended hours where the wholesaler route is not available.
The instruction that survives translation is the smallest one. Use a limit order. In India it protects you from a real hole in the book. In the United States it protects you on the days the hidden liquidity is not there either.
Carry this
- Limit orders by default. Market orders need 3 conditions, not 1.
- A stop-loss market order becomes a market order at the worst moment.
- If you cannot name the worst price you would accept, you do not have a trade yet.