Do you know What is cover order in stock market? If not then today you will know complete details in this topic.
But, it is difficult to make profits in trading positions if you are not aware of such orders as well as the stock market.
Well if you are wondering why you should learn cover orders? So let us tell you that, it is very easy to maximize your earnings and minimize losses in intraday trading.
Let’s start with Cover Order Meaning :-
COVER ORDER MEANING
The stock market offers you various segments in which you can trade and earn better profits. But when trading in any segment, for example, Equity, Intraday, Futures etc. you have to pay a certain margin amount.
Now, this margin amount is usually levied to cover the loss incurred during the course of the trade. But do you know that you can also get a chance to give less margin? This is possible through cover orders.
A cover order is a type of order that provides the trader and broker an opportunity to reduce trading risk while simultaneously allowing the trader to take advantage of high leverage.
Cover Order in Share Market
In the stock market, a cover order is similar to a market order, which is placed in conjunction with a stop-loss order.
Here the market order is the order that has been placed at the current price. Whereas a stop-loss order is the order type that allows you to minimize the loss when the market conditions reverse.
Now, since the cover order uses a stop-loss, there is a minimal loss potential here.
Let us take an example to understand this.
Suppose you place a cover order to buy 1000 shares of Infosys at ₹1230 per share. Now, since this is a cover order, here you place a stop loss at ₹ 1230. Thus, you can face a maximum loss of ₹20 per share or ₹20,000.
Since, here the loss is calculated in advance, the margin requirement can be reduced to a great extent. Now you have understood the basics of Cover Order. Now let’s talk about its type further.
Cover order types
Depending on the position, cover orders are generally of two types, long cover orders and short cover orders. Both types of trades are executed with the aim of maximizing profit and minimizing losses.
The basic differences between the two are discussed below.
Long cover order
Before explaining the concept of long cover order, let us take an example. Let’s say a person wants to buy the shares of SAIL (Steel Authority of India Limited) and places a long cover order at Rs 200 per share with a stop loss at Rs 190 at the same time.
Therefore, in case of a long cover order, a trader sets the SL order value less than the purchase value of the majority stock or shares.
“Long cover order = less stop-loss than the stock price”
Now, let us understand the meaning of long cover order.
Thus the long cover order is placing a stop loss at a price below the market price as well as the buy price. In this, the trader buys the V stock which shows a bullish trend.
Short cover order
Short cover order is completely opposite to long cover order, but before understanding its duration, let’s take a look at its example!
For example, let us say that the share of a firm named Y SAIL or Steel Authority of India, at a cost of Rs 250 per share and while trading it wants to sell at Rs 260 per share on a Rs-loss order. Now, when the price of the underlying asset reaches Rs. The 260 trade will itself be squared off.
Therefore, in case of short cover orders, the stop-loss order price is usually higher than the current price of the stock.
“Short cover order = stop loss above stock price”
While trading, when a trader or investor places an organization’s sell order through a cover order, it is considered a small cover order.
Short as Y, the investor aims to sell the underlying asset or security at a slightly higher price than the one he bought at a much lower price.
How does cover order work?
Keeping the above example in mind, let us understand how COVER ORDER IN HINDI works. So when you fill all the details the order gets executed activating the stop-loss order.
When you click the Buy button after placing a cover order, the Stop Loss Limit order order is activated. Now comes two different situations:
Market Follows Upward Trend :-
Here you can sell the shares at a higher price and exit the market by making a good profit. So in the above example if the share price reaches 1000, you can exit the trade by recovering a profit of ₹ 33 per share or ₹ 33,000 in the total trade.
Market trend reverse:-
If before the square-off time, the market trend turns and goes beyond your estimation, you will still be able to cover your losses with a stop-loss.
So let’s say the market goes down and the stock price goes below 940, yet your order gets executed at 950 thus saving you huge losses.
Thus, in the above trade, Sharma in the overall trade. 7 per share i.e. 7000.
Advantages and disadvantages of cover orders
Now, you know what COVER ORDER IN HINDI is and you know the process of placing it. Before getting into the conclusion part, let’s look at their advantages and disadvantages so that you can have a better idea about whether or not to use them.
In addition, prior familiarity with the associated risk or loss helps to trade correctly.
Advantages of cover order
Cover orders have two essential advantages that differentiate it from other brokers available in the market, such as bracket orders, AMOs, etc.
Almost every trader appreciates high leverage on a trading position through a cover order as it integrates the mechanism of stop-loss orders.
This system completely minimizes the risks that a trader can take in contrast with regular trading orders, and hence generates high leverage.
For example, the leverage on equity cash can be several times the value of an agreement.
reduces the level of risk
By placing a cover order (CO) during the trading process, the risk or loss associated with the position is significantly reduced. This is a direct result of a stop-loss order.
However, if no stop loss is placed, a large amount of loss can also occur. Thereafter, it allows a trader to place buy or sell orders as per his risk appetite. In addition, traders have to constantly watch for fluctuations in share cost and limit losses.
Disadvantages of cover orders
Let us have a look at some of the bad aspects of cover orders –
- Well, unfortunately, traders cannot skip stop-loss orders. However, he can modify it before it is squared off.
- With cover orders, traders cannot leave an order before it is paid off before day trading.
- Then, unfortunately, if the price of the underlying asset does not hit the stop loss price, the possibility of a lower capital gain is possible as it will be automatically executed before the end of the day, which is usually 3:20 pm.
WHAT DID YOU LEARN TODAY
I hope you have liked my article on What is cover order in stock market. It has always been my endeavor to provide complete information about the future of stock market to the readers, so that they do not have to search any other sites or internet in the context of that article.
This will also save their time and they will also get all the information in one place. If you have any doubts about this article or you want that there should be some improvement in it, then you can write comments below for this. this is only for educational purpose.