Cover Order: What is it and How to Explain it in Stock Market?
While trading in the stock markets, there is a cash margin that every investor needs to pay. This margin is paid to the individual stockbroker or the brokerage firm for covering the risks involved in the trade. But what happens when the investor opts for paying a lower margin? In that case, they can opt for a cover order or a bracket order.
So, what is a cover order in stock trading? Of course, these are the built-in risk-mitigating mechanisms. But, apart from the fact that a cover order in the share market can let an investor get high leverage against the trade, there are several other benefits of cover orders. So, let’s delve deeper into the meaning of a cover order, its benefits, and cover order example.
What is a Cover Order?
A trader uses a cover order in the share market to take an intraday position while benefitting from extra exposure, thereby mitigating the risks through a stop-loss order. However, the ordering system can only place two cover orders simultaneously; a limit order or a market order and a stop-loss order. So, the cover order will only get triggered at the specified stop-loss price.
When the trigger price is hot, the stop-loss order will be executed as a limit order. And the combination of both these orders that will be placed simultaneously is called a cover order. As an investor, with cover orders, you can limit the losses incurred on your trading position.
Also Read: Stop Loss Strategy
Benefits of a Cover Order
Cover orders offer maximum profits with limited risks. Cover orders help investors minimise the trading risks and offer better control over risk mitigation. Since even the stop-loss order corresponds to the cover orders, the latter helps investors trade in a much better and disciplined manner. One can also take advantage of the margins.
The cover order can leverage the position of the investors while helping them enjoy several benefits of the stop-loss order to protect themselves from any downfall. Simply put, cover orders will reduce the risks in trading; however, they will not impose any kind of limit on the returns.
How Does Cover Order Work?
Cover orders are essentially two-legged orders in the share market. First, the investors should place a buy or sell order with a corresponding stop-loss order that’s compulsory. This is how cover orders work:
- The first cover order will be a limit order or a market order.
- There will be a corresponding stop-loss order. So, when the trigger price hits the corresponding stop-loss order, it gets activated as a market order.
- The trigger prices are defined every day, and the investor needs to place the stop-loss order within a specified price range. For instance, if Adani Group is trading its shares at ₹900, and the trigger range is specified as 10%, the investor can agree to a stop-loss order between the trigger price range of ₹810 and ₹990.
- Once the cover orders are placed, and the first leg of the trade is completed, the investor will no longer have the ability to cancel the cover order. They can, however, only exit the present one-sided trading position.
- The investor can cancel the cover order if the first order hasn’t been traded yet.
- The stop-loss order placed could be changed or modified within a stipulated price range. Once the order is modified, the trading margin will be redefined.
Improvising a Cover Order with a Bracket Order
A bracket order is slightly different from a cover order. A cover order includes a stop-loss order and fresh order. In contrast, a bracket order includes a profit target as well. So, in a bracket order (or a protect profit order), an investor can have a fresh order along with a stop-loss order plus a profit booking order.
So, what happens to the stop-loss order when the profit target is achieved? It depends upon the order that’s triggered first. And then, the other order gets automatically cancelled. So, if the stop-loss order gets triggered first in your case, then the profit booking order will be cancelled automatically.
Likewise, if the profit booking order is achieved first, the stop-loss order will be cancelled. As an investor, you will be free to change the levels of stop-loss order and the profit booking target at any time before 3:10 PM.
Also Read: Most accurate Intraday Trading Indicators
Cover orders are used to mitigate the risks of trading for the investors. It also provides several additional leverages to the traders in the share market. So now that you have got an idea about the concept of cover orders, go ahead and try to make the best of it through trading! All the best!
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Frequently Asked Questions
A cover order can also be termed as a market order that is placed by an investor along with a stop-loss order for intraday trading.
Controlled trading losses - Cover Orders can be a life-saver for traders. When a trader places a cover order without a stop-loss order, they will be at risk of losing a considerable portion of their wealth. Since a Cover Order considers a compulsory stop-loss order, traders are less likely to lose track of their losses and can control them as well.
Higher leverage - Since the mandatory Stop-Loss order lessens the risk to a great extent, the leverage offered to the traders on Cover Orders is usually a lot higher as compared to a normal intraday order.
A trader can place a cover order either as a limit order or a market order. Although a market order implements the order at the current stock market price, a limit order is only executed when the stock price hits the desired entry price.