Securities Trading: Types of orders, Margin Trading
TYPES OF ORDERS
The most common types of orders are market orders, limit orders, and stop-loss orders.
- A market orderis an order to buy or sell a security This type of order guarantees that the order will be executed, but does not guarantee the execution price. A market order generally will execute at or near the current bid (for a sell order) or ask (for a buy order) price. However, it is important for investors to remember that the last-traded price is not necessarily the price at which a market order will be executed.
- A limit orderis an order to buy or sell a security at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Example: An investor wants to purchase shares of ABC stock for no more than $10. The investor could submit a limit order for this amount and this order will only execute if the price of ABC stock is $10 or lower.
- A stop order, also referred to as a stop-loss orderis an order to buy or sell a stock once the price of the stock reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.
- A buy stop orderis entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or protect a profit on a stock that they have sold short. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or protect a profit on a stock they own.
Margin Trading Facility (MTF)
Margin Trading Facility (MTF) is a facility offered to an investor in buying of shares and securities from the available resources by allowing him to pay a fraction of the total transaction value called a margin. The margin can be given in the form of cash or shares as collateral depending upon the availability with the respective investor. In short, it can be termed as leveraging a position in the market with cash or collateral by the investor. In this transaction the broker funds the balance amount.
Till last year MTF was allowed against the cash margin not against shares as collateral. Now Securities Exchange Board of India (SEBI) has relaxed the said criteria vide its circular no. SCIR/MRD/DP/54/2017 dated June 13, 2017. Investors are now allowed to create a position under MTF against shares as collateral as well.
SEBI and Exchanges monitor tightly the securities eligible under the MTF and margin required (through cash or shares as collateral) on such securities are prescribed by them from time to time. Currently, the securities forming part of Group 1 securities are included in MTF.
Features of MTF:
- Investors who wish to avail the MTF need to undertake by signing/accepting additional Terms and Conditions. It ensures that investors are completely aware of the risk and rewards of trading in it.
- Allows investors to create leverage position in securities which are not part of derivatives segment.
- The positions can be created against the margin amount which can be in the form of cash or shares as collateral.
- Position can be carried forward up to T+N days (T = means trading day whereas N = means a number of days the said position can be carried forward). The definition of N varies from broker to broker.
- Securities allowed under MTF are predefined by SEBI and Exchanges from time to time.
- Only corporate brokers are allowed to offer MTF as per SEBI regulations.
Benefits for Investors:
- MTF is ideal for investors who are looking for benefit from the price movement in short-term but not having sufficient cash balance.
- Utilization of securities available in portfolio/demat account (using them as shares as collateral).
- Improve the percentage return on the capital deployed.
- Enhance the buying power of the investors.
- Prudently regulated by the regulator and exchanges.