A day order is a type of trading order given to the broker, instructing them to buy or sell specific assets. The caveat is that day orders are only valid for one trading day. If day orders are not executed within the span of a trading day, they stand cancelled. Unlike after-market orders that get carried over to the next trading day, day orders expire at the close of the current day.
A day order is executed if the asset reaches the price specified in the order. If it does not, the order is allowed to expire.
Understanding day orders
A day order is one of the different order duration types used to define how long the order stays in the market before it is cancelled. In keeping with the meaning of a day order, this duration is equivalent to one trading session. In simple words, if the order is not executed on the day it was placed, the order gets cancelled.
GTC and IOC are other common duration-based orders in trading. GTC or ‘Good Until Cancelled’ orders remain active until manually cancelled, while IOC or ‘Immediate or Cancel’ orders are ones where all or part of the order is immediately executed. If there is a portion of the IOC order that cannot be unfulfilled, that portion gets cancelled.
Usually, day orders serve as the default order duration on most trading platforms. In other words, to choose a different order duration, the trader must specify a different timeframe for order expiration.
Using day orders
Day orders can be particularly useful when ordering a security at a specific price point. Traders can avoid monitoring the security for the rest of the day by waiting for the precise time to execute the order. With day orders, day traders can focus on trading multiple securities at the same time. Before the trading day commences, traders can assess and analyse each security and place orders based on their investing strategy.
Advantages and disadvantages of day orders
Understanding what is a day order and how it works is not enough. As a trader, you also need to acknowledge the opportunities and risks of placing day orders. To give you a thorough understanding of both, we have listed them in detail below:
Advantages of day orders
Day orders allow traders to plan a trading day without needing to monitor the price action. This is a significant advantage for traders who need to monitor multiple asset levels. Additionally, day orders help maintain liquidity in the market. Since these orders are valid for only one trading day, they help ensure a constant flow of orders in the market.
Disadvantages of day orders
There are certain risks associated with day orders. When the share market is volatile, stock prices can change rapidly. In such instances, traders remain vulnerable to order fulfilment at an unfavourable price due to slippage. For instance, if you place a day order to sell a stock and the stock price falls significantly, you may risk hefty losses.
Example of a day order
Let us say you want to buy 100 shares of the company ABC. Currently, the stock is trading at Rs. 150 per share. Since you expect the price to fall before it rallies again, you decide to place a day order for 100 shares at Rs. 140. If the price of the stock falls to Rs. 140 during the order day, your order will be executed. However, if the price does not fall to Rs. 140 within the current trading day, your order will automatically expire at the end of the trading day.
Conclusion
A day order is only good for a trading day and expires if not fulfilled within the current trading session. While day orders are beneficial for investors with a certain level of market knowledge, they may also lead to losses during volatile periods. To limit losses, experienced investors use limit orders with a day’s trading duration. Institutional investors use smart order routing to ensure orders are executed at the best price across different trading platforms.
