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Orders and its Types

Discuss Orders and its Types within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; TYPES OF ORDERS Market Order When a trader places a buy or sells order at a price, which prevails in ...

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Orders and its Types
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Sunanda K. Chavan
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Orders and its Types - October 8th, 2010

TYPES OF ORDERS

Market Order
When a trader places a buy or sells order at a price, which prevails in the futures pit at the time, the order is given; it is called a Market Order.

Limit Order

If the trader specifies a particular price or the price limit within which the order should be executed, such an order is called a Limit Order. In such orders, the inherent risk is that the specified price or the band may never be hit during the day and the position may not be closed out.

Market-If-Touched (MIT) Order

If an order is executed at the best available price after trade occurs at a particular price or at a price more favourable then the specified price, it is called the Market-if-Touched Order.

Stop Loss Order

When a trader holds a position, either long or short and wants to restrict his downsize, he would place an order specifying a rate at which the deal could close out. This would insure him against a run away loss in the event of a drastic adverse price movement. Stop Loss Orders are normally placed by specifying a range in which the order should be executed instead of giving a single price order. The risk in the latter case is that the order may not get executed as in a violent price movement; the specified price may get jumped.

Good Till Cancelled (GTC) Order
In terms of National Stock Exchange (NSE) regulations good till cancelled orders shall be cancelled at the end of 7 calendar days from the date of entering the order.


THE CLEARING MECHANISM

A clearinghouse is an inseparable part of a futures exchange. This exchange acts as a seller for the buyer and a buyer for the seller in the process of execution of a futures contract.
For example, the moment the buyer and the seller agree to enter into a contract, the clearing house steps in and bifurcates the transaction, such that,

• Buyer buys from the clearing house, and

• Seller sells to the clearinghouse.

Thus, the buyer and the seller do not get into the contract directly; in other words, there is no counter party risk. The idea is to secure the interest of both.

In order to achieve this, the clearinghouse has to be solvent enough. This solvency is achieved through imposing on its members, cash margins and/or bank guarantees or other collaterals, which are encashable fast. The clearinghouse monitors the solvency of its members by specifying solvency norms.

The solvency requirements normally imposed by the clearinghouse on their members are broadly as follows.

1. Capital Adequacy
Capital adequacy norms are imposed on the clearing members to ensure that only financially sound firms could become members. The extent of capital adequacy has to be market specific and would vary accordingly.

2. Net Position Limits
Such limits are imposed to contain the exposure threshold of each member. The sum total of these limits, in effect, is the exposure limit of the clearing association as a whole and the net position limits are meant to diversify the association’s risk.

3. Daily Price Limits
These limits set up the upper and the lower limits for the futures price on a particular day and incase these limits are touched the trading in those futures is stopped for the day.

4. Customer Margins
In order to avoid unhealthy competition among clearing members in reducing margins to attract customers, a mandatory minimum margin is obtained by the members from the customers. Such a step insures the market against serious liquidity crisis arising out of possible defaults by the clearing members owing to insufficient margin retention.

In order to secure their own interest as well as that of the entire system responsible for the smooth functioning of the market, comprising the stock exchanges, clearing houses and the banks involved, the members collect margins from their clients as may be stipulated by the stock exchanges from time to time. The members pass on the margins to the clearinghouse on the net basis i.e. at a stipulated percentage of the net purchases and sale position while they collect the margins from clients on gross basis, i.e. separately on purchases and sales.
The stock exchanges impose margins as follows:

a) Initial margins on both the buyer as well as the seller.

b) Daily maintenance margins on both.

c) The accounts of the buyer and the seller are marked to the market daily.
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Rose Marry
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Re: Orders and its Types - April 15th, 2016

Quote:
Originally Posted by sunandaC View Post
TYPES OF ORDERS

Market Order
When a trader places a buy or sells order at a price, which prevails in the futures pit at the time, the order is given; it is called a Market Order.

Limit Order

If the trader specifies a particular price or the price limit within which the order should be executed, such an order is called a Limit Order. In such orders, the inherent risk is that the specified price or the band may never be hit during the day and the position may not be closed out.

Market-If-Touched (MIT) Order

If an order is executed at the best available price after trade occurs at a particular price or at a price more favourable then the specified price, it is called the Market-if-Touched Order.

Stop Loss Order

When a trader holds a position, either long or short and wants to restrict his downsize, he would place an order specifying a rate at which the deal could close out. This would insure him against a run away loss in the event of a drastic adverse price movement. Stop Loss Orders are normally placed by specifying a range in which the order should be executed instead of giving a single price order. The risk in the latter case is that the order may not get executed as in a violent price movement; the specified price may get jumped.

Good Till Cancelled (GTC) Order
In terms of National Stock Exchange (NSE) regulations good till cancelled orders shall be cancelled at the end of 7 calendar days from the date of entering the order.


THE CLEARING MECHANISM

A clearinghouse is an inseparable part of a futures exchange. This exchange acts as a seller for the buyer and a buyer for the seller in the process of execution of a futures contract.
For example, the moment the buyer and the seller agree to enter into a contract, the clearing house steps in and bifurcates the transaction, such that,

• Buyer buys from the clearing house, and

• Seller sells to the clearinghouse.

Thus, the buyer and the seller do not get into the contract directly; in other words, there is no counter party risk. The idea is to secure the interest of both.

In order to achieve this, the clearinghouse has to be solvent enough. This solvency is achieved through imposing on its members, cash margins and/or bank guarantees or other collaterals, which are encashable fast. The clearinghouse monitors the solvency of its members by specifying solvency norms.

The solvency requirements normally imposed by the clearinghouse on their members are broadly as follows.

1. Capital Adequacy
Capital adequacy norms are imposed on the clearing members to ensure that only financially sound firms could become members. The extent of capital adequacy has to be market specific and would vary accordingly.

2. Net Position Limits
Such limits are imposed to contain the exposure threshold of each member. The sum total of these limits, in effect, is the exposure limit of the clearing association as a whole and the net position limits are meant to diversify the association’s risk.

3. Daily Price Limits
These limits set up the upper and the lower limits for the futures price on a particular day and incase these limits are touched the trading in those futures is stopped for the day.

4. Customer Margins
In order to avoid unhealthy competition among clearing members in reducing margins to attract customers, a mandatory minimum margin is obtained by the members from the customers. Such a step insures the market against serious liquidity crisis arising out of possible defaults by the clearing members owing to insufficient margin retention.

In order to secure their own interest as well as that of the entire system responsible for the smooth functioning of the market, comprising the stock exchanges, clearing houses and the banks involved, the members collect margins from their clients as may be stipulated by the stock exchanges from time to time. The members pass on the margins to the clearinghouse on the net basis i.e. at a stipulated percentage of the net purchases and sale position while they collect the margins from clients on gross basis, i.e. separately on purchases and sales.
The stock exchanges impose margins as follows:

a) Initial margins on both the buyer as well as the seller.

b) Daily maintenance margins on both.

c) The accounts of the buyer and the seller are marked to the market daily.
Hi buddy,

Here I am sharing Study on Order Types , so please download and check it.
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