What is Cover Order?
Cover order is another type of intraday order that combines a buy order and a compulsory stop-loss order. It has an inbuilt risk-mitigating mechanism. It helps minimise losses by safeguarding traders from unexpected market movements.
Cover order = initial order (buy or sell) + stop-loss order (sell or buy).
Cover orders offer significant leverage and are available in both Equity F&O and Equity Cash. The two limit or market order and stop-loss order can be used to buy long or sell short.
The main benefit is the ability to place a stop-loss order and hedge a position against a substantial capital loss. In addition, the mandatory Stop Loss feature minimises risk significantly, and the leverage offered on Cover Orders is far higher than that of naked intraday orders.
Furthermore, with a cover order, you are well aware of the maximum loss you will bear in advance. Since the cover orders are only intraday orders, any open positions will be automatically squared off by the system at the stipulated time.
What are the Different Types of Cover Orders?
1. Long Cover Order
Long cover order is an order that a trader executes when he or she wants to buy the stocks during the trading period. Moreover, this also implies that the traders are following a bullish trend to buy the stocks. This order is placed along with a stop loss order at a price which is lower than the buying price.
2. Short Cover Order
If a trader wants to sell the stocks then they will place a short cover order. Here the stop loss order will be higher than the stock price. The short cover order is complete in contrast to the long cover order.
How Does Cover Order Works?
It has two constituents, namely the market order or limit order and a stop-loss order. A market order will allow the trader or investor to buy or sell at the market price. And a limit order will require only the trader to buy or sell the stock at the desired price.
A cover order must include a stop-loss order. A stop-loss order will reverse the initial order in case the market is in unfavourable conditions. A stop-loss order will ultimately reduce the risk for the trader. The stop-loss order can be modified anytime during the day but cannot be cancelled.
Let’s understand the cover order better with the help of an example. If you place an order to sell 100 shares of a company at a market price of INR 75 and also place a stop-loss order at INR 80. If the share price starts going up after you sell the shares, the maximum loss you will incur is INR 5 per share as the stop-loss order is placed.
However, you can also modify this order and change the stop loss to INR 78 if you want to restrict the loss further. But if the share price doesn’t rise and the stop loss is not triggered, the exchange squares off the position leading to lower capital losses.
List of Stock Brokers Providing Cover Orders in India
Following is the list of brokers offering in India.
- HDFC Securities
- Kotak Securities
- Motilal Oswal
- IIFL Securities
- Alice Blue
Advantages of a Cover Order
Cover orders assist traders to reduce downside risks and provide them better control over risk management. It can assist traders in trading more systematically because each trade always has a stop loss associated with it. Traders can profit from the advantages of margin by leveraging their positions significantly using this facility. It offers the added benefit of a stop loss which acts as a safeguard from downside risk. Overall, it minimize downward risk without restricting returns.
Disadvantages of a Cover Order
The major disadvantage is that it does not allow the traders to cancel or exit. The traders have to necessarily square off the position at the end of the trading day. Moreover, the position is squared off on hitting the trigger stop loss and buy order. However, a trader can modify the cove rorder before squaring off the position. The order is squared off if the price hits the stop loss trigger price before the end of the trading day. This might result in lower capital gains during the rest of the trading day. Hence, a trader must choose the stop loss trigger price wisely.
Frequently Asked Questions
No, a cover order is not applicable to trading in stock and currency options.
Cover orders are highly volatile along with lower liquidity. Due to these characteristics, cover orders are not available for stock options. Moreover, currency options are highly leveraged for traders as well as brokers. If a cover order is allowed then it would increase the risk for traders and brokers. Hence, cover orders are not applicable to currency options.
Yes, you can modify a cover order. However, you can modify a cover order until it is under open orders.
No, the cover order is automatically squared off after execution at the end of the trading day. However, if the cover order is yet not executed then you can cancel it.
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