What is Cover Order?

Stock market trading is simply buying and selling of shares of different companies. Many people in India are now trying intraday trading. This means they buy and sell shares on the same day before the market closes. This can make quick profits but can also be risky at times. 

Managing risk is one of the most important parts of intraday trading. It means you decide how much money you are willing to lose before you even start. Without a plan, one bad trade can take away all your savings. This is why tools like cover orders are so popular in India. Let us start by looking at what is cover order and how it keeps your money safe.

What is a Cover Order?

If you are new to the market, the cover order meaning is very easy to understand. This acts like two-in-one deal. When you buy a stock, you usually place one order. But with this special type, you place two orders at the very same time.

The first part is your main order. This is where you buy or sell the stock. The second part is a stop-loss order. This second part is like a security guard. It stands there to watch your trade. If the price goes the wrong way and hits a certain limit, this guard will automatically close your trade.

Using a cover order in the share market means you are “covering” your risk from the start. You don’t have to wait and watch the screen every second. The system already knows when to pull you out of a bad trade. Many beginners ask what is a cover order when they see the option on their trading app. It is simply a way to trade with a safety net. This makes cover trading a great choice for people who want to be disciplined and avoid big losses.

Key Features of Cover Orders

Every trading tool has its own set of rules. Here are the main things you should know about these orders.

• Mandatory Stop-Loss Order: In a normal trade, you can choose to set a stop-loss or not. But in this case, it is compulsory. You cannot place the order without telling the system where to stop the loss. This forces you to be a disciplined trader.
• Intraday-Only Order Type: These orders are only for people who want to finish their trades on the same day. In India, the market closes at 3:30 PM. If you do not close your trade by 3:15 PM, your broker will usually do it for you automatically. You cannot hold these shares for the next day.
• Higher Leverage with Lower Margin: Brokers give you “leverage,” which is like a temporary loan to buy more shares. Because you have a mandatory stop-loss, the broker feels safer. They know you won’t lose too much money. So, they let you trade with more money than you actually have in your account.

Types of Cover Orders

There are basically two ways you can use this tool depending on your view of the market.

1. Long Cover Order: You use this when you think the market will go up. You buy first and set a stop-loss below your buying price. It is for the “bulls” who are feeling positive.
2. Short Cover Order: You use this when you think the market will go down. You sell first and set a stop-loss above your selling price. It is for the “bears” who think prices will fall.

Two Legs of a Cover Orders

Every such order has two “legs” or parts.

• The Main Leg: This is your entry into the market. It can be a buy or a sell.
• The Stop-Loss Leg: This is your exit plan. It always works in the opposite direction of your first move to protect you.

Read Also: What is Covered Call?

Benefits of Cover Orders

• Risk Management: You know exactly how much you might lose. This stops you from making emotional mistakes when the market gets scary.
• Automation: You don’t have to keep staring at the charts. The system handles the exit for you.
• Higher Leverage: You can trade a larger quantity of shares with less money. This can lead to better profits if your timing is right.
• Peace of Mind: You can go about your day. If you are a working professional, you don’t have to worry about a sudden market crash wiping you out.
• Faster Execution: Both the entry and the safety exit are sent to the exchange at once. This saves precious seconds.

Risks & Limitations of Cover Orders

• Mandatory Stop-Loss: Sometimes the price might hit your stop-loss and then immediately go back up. Because the stop-loss is mandatory, you might get “kicked out” of a trade too early.
• Intraday Only: You cannot change your mind and keep the shares for a few days. You must exit before the day ends, even if you are in a small loss.
• No Trailing Stop-Loss: Most basic cover orders don’t move automatically with the price. If the price goes up, you have to manually move your stop-loss higher to lock in profits.
• Slippage Risk: In a very fast market, the price might jump over your stop-loss. This means you might lose a little more than you planned because the system couldn’t find a buyer at your exact price.
• Over-Leverage Risk: Because the broker gives you extra money, you might be tempted to take very big trades. If many trades go wrong, it can still hurt your account.

Cover Order vs Bracket Order

Number of Orders: A cover order has two parts (Entry + Stop-loss). A bracket order has three parts (Entry + Stop-loss + Target Profit).

In a cover order, you only set the bottom limit for loss. You have to manually sell to book your profit. In a bracket order, you set both the bottom limit and the top profit target.

Use a cover order if you want to let your profits run as high as possible. Use a bracket order if you want to be completely “hands-off” and let the system book your profit too.

Example of a Cover Order

Example for Buy (Long Position)

Let’s say you want to buy shares of Reliance at Rs.2,500 and you think that the price will go upto Rs.2,550. But risk also needs to be managed and you decide to exit if the price falls to Rs.2,480. 

You place a buy cover order and your main order is at Rs.2,500. Your stop-loss is at Rs.2,480. If the price goes up to Rs.2,550, you can sell and make a profit of Rs.50 per share. But if the price starts to drop at Rs.2,480, the system will automatically sell it for you. Here you will only lose Rs.20 per share and the losses are capped.

Example for Sell (Short Position)

Short selling means you sell the shares first believing that the price will fall. Imagine HDFC Bank is at Rs.1,600 and you believe that the prices will go down, you sell it at Rs.1,600. 

A stop-loss at Rs.1,615 is set, but if the price goes up instead of down, you will lose money. But once it hits Rs.1,615, the system will buy the shares back for you. You stop your loss at Rs.15 per share.

This tool helps you see the balance. You decide the risk (the stop-loss) and you hope for the reward (the profit). It makes your trading very clear and logical.

Read Also: Best Fast Order Execution Broker Platforms in India

Conclusion

Trading in the share market is a journey. Like any journey, safety should come first. The cover order is a simple and powerful tool that gives you that safety. It helps you manage your risk, gives you extra trading power, and keeps your emotions in check. Whether you think the market is going up or down, this tool helps you trade with a clear plan.

For more market news and insights, download Pocketful – offering users zero brokerage on delivery trades and an easy to use platform designed for both beginners and experienced investors.

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