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Basic Terms in Trading – Part 2 – Stock Market Tutorial

Market Live brings in the Stock Market Tutorial explaining the basic and essential terms involved during Online Trading in the Share Market. Buy/Sell Orders, Limit Prices, Stop Loss Prices, Trigger Prices – All the Stock market Trading jargons are explained in a simple manner here.

Look here for Part 1 of this Series

Why didn’t my Limit Order get executed ?

There may be multiple reasons for your order not getting executed in the Stock Market. We will discuss the common problems due to which your order might not get executed. However we will not cover the reasons which include the Online system failure, Server Failure, Error in processing your order by the system etc.

The most common reason for a Limit Order not to get executed, is the fact that the price of the stock did not actually reach the limit price during the market trading hours. You can actually check the ‘Day High’ and ‘Day Low’ prices of your stock to verify that your specified Limit price was not reached indeed, and you were over optimistic in choosing the Limit Price.

In some cases you might notice that the ‘Day High’ or ‘Day Low’ prices indicate that your Limit price is actually reached, but your order is not executed. This may happen due to the fact that there were more pending orders placed in the Stock Market, prior to your order, at the same limit price as specified by you, and the price of the stock overturned again and moved in the opposite direction before your order was executed.

In any case there should be sellers in the market who wish to sell the specified quantity of stocks at your desired price, if your buy order needs to get executed. Similarly there should be buyers who wish to buy the stock at the price specified by you, if your sell order needs to get executed. So your order might not get executed if there aren’t enough buyers or sellers for this stock at the price specified by you. Sometimes if there are limited buyers or sellers, then your order can get ‘Partially executed’, meaning that a partial portion of the number of stocks specified by you might be bought or sold at the specified Limit price.

Why didn’t my Market Order get executed ?

As explained previously, when you place a Market order, an order will be placed in the Stock Exchange for either buying or selling the stock at the Last Traded Price of the stock. However in some instances, the market orders may not get executed completely or partially. The most common reason for this would be a steep rise or fall in the price of the stock within a short duration. In such a case the price of the stock shoots up or falls down very rapidly and moves up or down the Last Traded Price very rapidly. So in these cases the orders do not get executed. Also if such huge movements are seen, then the orders can also get partially executed depending on the current price and the Last traded price when you ordered.


What is Stop Loss / Trigger Price ?

As the name itself implies ‘Stop Loss’ prevents you from incurring more losses. When you place a buy order or sell order you can specify the Stop Loss Price for your order. This price will actually act as a ‘trigger’ as to when your order needs to get executed. This is explained in detail below.

Stop Loss for a ‘Buy’ Limit Order

When you are placing a Buy order, you can specify a Stop Loss Amount. Generally the Stop Loss Amount for a Buy order should be equal to or greater than the Last Traded Price of the Stock in the Exchange.

For example suppose that you had stocks of company ‘A’ and you have sold these stocks at Rs.300, in anticipation that the price of this stock will come down in the future. You would wish to buy the stocks at a lower price (lesser than Rs 300) so as to make a profit in the trade. But after selling, now you see that the price of the stock is increasing, rather than falling down. So currently you are under a loss. If the price of the stock continues to increase, then your loss deepens. But it may also happen that this increase is a temporary blip and later on the price may again come down. Under such circumstances, you can place a Stop Loss Price for Buy order to minimize the losses.

Let us assume that you do not want to take losses greater than Rs. 25 per stock. Then your Stop Loss Price becomes Rs. 300 + Rs. 25 = Rs. 325. So, until the price of the stock is lesser than Rs.325, your buy order will not get triggered. In case the price of the stock is rising above Rs.325, then the buy order gets activated and gets executed if there are sellers at the specified price. If the order is executed, you will be under a loss of Rs.25 per stock.

Assume that after your buy order has been executed, the stock price has rised further and reached Rs. 350. In this case, the ‘Stop Loss’ order has saved you from incurring an additional loss of Rs.25 per stock.

Stop Loss for a ‘Sell’ Limit Order

When you are placing a Sell order, you can specify a Stop Loss Amount. Generally the Stop Loss Amount for a Sell order should be equal to or lesser than the Last Traded Price of the Stock in the Exchange.

For example suppose that you have bought stocks of company ‘A’ at Rs. 325, in anticipation that the price of this stock will rise above Rs. 325. You would wish to sell the stocks at a higher price (higher than Rs. 325) so as to make a profit in the trade. But after buying, now you see that the price of the stock is decreasing, rather than gaining up. So currently you are under a loss. If the price of the stock continues to fall, then your loss deepens. But it may also happen that this fall is a temporary blip and later on the price may again come up. Under such circumstances, you can place a Stop Loss Price for Sell order to minimize the losses.

Let us assume that you do not want to take losses greater than Rs. 25 per stock. Then your Stop Loss Price becomes Rs. 325 – Rs. 25 = Rs. 300. So, until the price of the stock is greater than Rs.300, your sell order will not get triggered. In case the price of the stock is falling below Rs. 300, then the sell order gets activated and gets executed if there are buyers at the specified price. If the order is executed, you will be under a loss of Rs.25 per stock.

Assume that after your sell order has been executed, the stock price has fallen further and reached Rs. 250. In this case, the ‘Stop Loss’ order has saved you from incurring an additional loss of Rs.50 per stock.

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