Current Market Price (CMP) in the stock market refers to the prevailing price at which a stock is traded at a given moment. It is the price at which a buyer or seller can execute a trade instantly. The CMP fluctuates constantly due to changes in market demand and supply. Even within an hour, the value of a stock may differ significantly. As a result, the CMP plays a pivotal role in investment decisions and is considered one of the most critical metrics used by investors and traders in their analysis.
What is CMP in the stock market?
The current market price (CMP) represents the ongoing trading price of a security in the stock market. This real-time value reflects the price at which a specific stock or financial instrument is being actively bought or sold, making it a crucial metric for investors. By providing immediate insights into a security's market valuation, CMP helps investors assess the real-time value of their investments. Comparing CMP with fundamental analysis allows investors to determine whether a stock is undervalued, overvalued, or priced fairly, thus guiding their investment decisions more effectively.
Example
Now that you know the full form of CMP and what it stands for, let us look at an example to try and understand the concept better.
Assume that there is a company, ABC limited, listed and traded on the Indian stock exchanges. Suppose that the previous closing price of the company’s stock was Rs. 2,500. When the trading window opens on the next day, the price at which the first trade gets executed between a buyer and seller will be its current market price.
If another trade is executed at a different price after the first trade, then the price at which the second trade is executed will become the stock’s CMP. This goes on until the trading window closes.
Now let us say that the first trade of the new trading day was executed at Rs. 2,510. This price will be the stock’s CMP until the next trade is executed. If the second trade is executed at Rs. 2,505, the current market price will change to reflect this new CMP.
Importance of CMP (Current Market Price)
As a beginner to investing, merely knowing the full form of CMP is not enough. You also need to look into how it can be useful for you while placing trades. Here is an overview of how you can use the current market price to make informed trading decisions.
1. Price movement evaluation
Monitoring the CMP of a stock can give you insights into how the market is moving. For example, the market may be indecisive if the current market price is fluctuating within a particular price range. On the other hand, if the CMP is consistently moving downward, the market could be on a downtrend, and vice versa.
2. Order placement
The CMP of a stock can be very useful if you are planning to place a market order. A market order is a type of order where you only specify the quantity you wish to purchase or sell and not the price. The order is executed automatically at the prevailing market price of the stock.
Therefore, knowing what the current market price can give you an estimate of the price at which your market order is likely to be executed. However, it is important to note that in volatile or fast-moving markets, the market order may get executed at a different price than the CMP due to the time delay in updating the current market price of the stock.
3. Portfolio monitoring
The current market price also gives you an accurate assessment of the value of your holdings in real time. This can come in handy when you are monitoring your portfolio and may help you make informed decisions about rebalancing your investments.
How to use CMP in trading?
Using the Current Market Price (CMP) in trading involves leveraging three types of orders: market orders, stop loss orders, and limit orders. Here’s a detailed explanation of each:
1. Market orders
- Definition: A market order is an instruction to buy or sell a stock immediately at the best available current market price.
- Usage:
- Buy market order: When you place a buy market order, you purchase the stock at the lowest price currently available in the market.
- Sell market order: When you place a sell market order, you sell the stock at the highest price currently offered by buyers.
- Characteristics: These orders are executed almost instantly and have a lower chance of being cancelled since they don't depend on a specific price, just the current market price.
- Example: If the CMP of a stock is Rs. 50, and you place a buy market order, you will purchase the stock at or around Rs. 50, depending on market fluctuations.
2. Stop loss order
- Definition: A stop loss order is designed to limit an investor's loss on a position by triggering a sale or purchase once the stock reaches a certain price.
- Usage:
- Sell stop loss order: Set below the CMP to minimise losses. If the CMP is Rs. 50 and you set a stop loss at Rs. 45, the order triggers a sale if the stock price drops to Rs. 45.
- Buy stop loss order: Set above the CMP, often used to enter a position in a rising market. If the CMP is Rs. 50 and you set a buy stop loss at Rs. 55, the order triggers a purchase if the stock price rises to Rs. 55.
- Characteristics: This helps in managing risk by predefining the loss limit.
Example: You own a stock with a CMP of Rs. 50. You place a stop loss order at Rs. 45. If the price falls to Rs. 45, your stock will be sold, preventing further loss.
3. Limit orders
- Definition: A limit order specifies the price at which you want to buy or sell a stock, and the order will only be executed if the market reaches that price.
- Usage:
- Buy limit order: Placed below the CMP to buy the stock at a desired lower price. If the CMP is Rs. 50, you might place a buy limit order at Rs. 48. The purchase will occur only if the stock price drops to Rs. 48.
- Sell limit order: Placed above the CMP to sell the stock at a desired higher price. If the CMP is Rs. 50, you might place a sell limit order at Rs. 52. The sale will occur only if the stock price rises to Rs. 52.
- Characteristics: Provides control over the price at which a trade is executed but does not guarantee execution if the market does not reach the specified price.
- Example: You wish to buy a stock, currently priced at Rs. 50, but only if it drops to Rs. 48. You place a buy limit order at Rs. 48. The order will execute only if the price falls to Rs. 48 within the timeframe you set.
In summary, understanding and using CMP effectively in trading involves selecting the right type of order based on your trading strategy and market conditions. Market orders provide immediate execution, stop loss orders help manage risk by setting predefined loss limits, and limit orders allow for precise control over trade execution prices.
Difference between CMP and LTP
The following table outlines the key distinctions between CMP and LTP (Last Traded Price):
Aspect |
Current Market Price (CMP) |
Last Traded Price (LTP) |
Definition |
The current price at which a stock can be bought or sold instantly. |
The price at which the last trade for the stock was executed. |
Nature of value |
Reflects the live, ongoing market price. |
Represents historical price information. |
Execution |
A market order placed now will be executed at the CMP. |
Indicates the price at which the most recent trade occurred. |
Example |
If the current best asking price of ABC Ltd. is ₹125.50, this is the CMP. |
If the last trade for ABC Ltd. was executed at ₹125, this is the LTP. |
Market conditions |
Can differ from the LTP, especially in low-liquidity conditions or wide bid-ask spreads. |
Remains constant until a new trade is executed. |
Usage |
Used to determine the real-time trading price of a stock. |
Useful for understanding historical trading activity. |
In highly liquid markets with tight bid-ask spreads, the CMP and LTP might often align. However, in less liquid markets or those with wider spreads, there can be a notable difference between the two metrics.
Conclusion
With this, you must now be aware of not just the full form of CMP but also how important it is for traders and investors alike. It is a vital metric that provides real-time information about the trading price of a stock.
As an investor, you must always thoroughly analyse the current market price of the asset before making a decision. Also, remember to account for increased market volatility and its impact on the CMP. This way, you can ensure that you make a well-informed decision that is in line with your trading goals and investment objectives.
