What is Cover Order? Is it the much-needed Safety Net for Stock Market Traders??

A cover order combines a market order, a limit order, and a stop-loss order. Cover orders allow you to make two orders for the same stock that compete at the same time. The first order is a Market Order, whereas the second order specifies a Stop Loss Trigger Price (SLTP) and a Limit Price.

Cover Order is a lifesaver, especially for Traders. Find out how by reading this article carefully. 

Content:

• Cover Order (CO) Meaning in Share Market
• How does Cover Order work?
• Advantages of Cover Order?
• Disadvantages of Cover Order?
• How to place Cover Order?
• How to square off Cover Order?
• Quick Summary
• FAQs (Frequently Asked Questions)

Cover Order (CO) Meaning in Share Market

A Cover Order (CO) is a type of order that is used to reduce the risk of something bad happening. A cover order is a market order, a limit order, and a stop-loss all in one. Because a stop-loss order is put in place, you already know how much you can lose if the trade goes against you.

In the stock market, the goal of cover orders, or CO, is to reduce the risk for both the broker and the trader while giving the trader more leverage.

How does Cover Order work?

Cover orders let you place two orders for the same scrip that go against each other at the same time. The first order is a Market Order, and the second order sets the Stop Loss Trigger Price (SLTP) and a Limit Price.

When you place the Stop Loss Order at the same time you open a position, the risk goes down immediately.

Buy Cover Order

When a trader uses a Cover Order to buy shares of a company, the transaction is called a Long Cover Order. Taking a long position in a company like Coal India means that a trader buys its shares at a low price in order to sell them later at a higher price.

Traders set a Stop-Loss value for a Long Cover Order that is less than the price they paid for the stock. For example, if Mr. A places a Long Cover Order on Coal India stock at ₹100 per share, he may set the Stop Loss at ₹90 per share.

Short Cover Order

When a trader sells shares of a company, like Hindustan Unilever, they are said to be “going short” on that company. A short cover order is a sale made through a cover order. By going short, investors try to sell their shares at high and purchase them at low.

Following that, a Stop-Loss value is entered that is greater than the price at which an asset is sold. For example, if Mr. A sells short in Company A at ₹100 per share, he may fix the Stop-Loss price at ₹110 per share. As a result, if the share price reaches ₹110, such stocks will be sold right away.

Market Cover Order

A Market Cover order is just a Cover Order placed at the best available market price along with a stop-loss trigger price. As you can see in the picture, all you have to do is type in the number of stocks you want to buy, enter the stop-loss amount based on how much risk you want to take, and press BUY.

Limit Cover Order

The only difference between a Limit Cover Order and a Market Cover Order is that with a Limit Cover Order, you get to choose the price at which you want to buy the stock. You can enter the number of shares you want to buy and the price at which the stop-loss order will be triggered.

Learn more about Limit Order.

Advantages of Cover Order

The main benefit of a cover order is to reduce the risks. But to be clearer, read the below explanations.

• Higher Leverage: Because they use the Stop-Loss Order mechanism, Cover Orders give traders more control over their trading positions. Compared to the regular order, this method reduces a trader’s risk by a reasonable amount, which lets them use more leverage.

• Low Risk: When a Cover Order is placed, the risk of the trading position goes down by a lot. This is because of the Stop-Loss Order, which lets traders set in advance how much they can lose in a trade. So, it enables traders to decide whether to buy or sell based on how much risk they are willing to take. Also, traders don’t have to keep an eye on share prices.

Disadvantages of Cover Order

Talking about drawbacks of Cover Order:

• Traders cannot cancel a Stop-Loss Order, but they can only modify it.
• Traders cannot exit a Cover Order before it has been squared off.
• If an asset’s prices do not trigger Stop-Loss, it will be automatically squared off, perhaps resulting in lesser capital gains.

How to place a Cover Order?

Below are the steps that would help you place a Cover Order easily. 

1. Log in to your  Alice Blue account.

2. Search the F&O scrip that you would want to trade. 

1. Select whether you want to buy or sell the instrument.
2. Select the Cover Order (CO) option.
3. Select whether you want to place a market or limit order.
4. Enter the quantity and price (in case of limit cover order.)
5. Enter stop loss value or trigger stop-loss.
6. Enter the price at which you want to collect your profits.

And you are done! 

How to square off Cover Order?

There are three ways in which a Cover Order can get placed. 

• When your trigger price is hit. 
• When your stop loss gets triggered. 
• If none of the above options are attained, the system closes the position before the market closes. Markets have specific timings as below
  • NSE Futures & Options – 3:15 pm
  • NSE Forex Futures & Options – 4:45 pm
  • MCX – 11:30 pm
  • The timing, again, differs from broker to broker.

To get a detailed understanding, watch our youtube video on How to Place orders on ANT MOBI. 

We hope that you are clear about the topic. But there is more to learn and explore when it comes to order types, and hence we bring you the other important order types that you should know:

Quick Summary

• A Cover Order (CO) is a type of order that includes a risk-mitigation function. Simply put, a cover order is a market order or a limit order combined with a stop-loss. Because a stop-loss order is issued, the maximum losses you will incur if the transaction swings against you are known in advance.
• Cover orders will enable you to place two opposing orders for the same scrip simultaneously. The first order is a Market Order, while the second order sets the Stop Loss Trigger Price (SLTP) and a Limit Price.
• Because you place the Stop Loss Order simultaneously as you take a position, the risk is instantly reduced.
• Cover Orders at Alice Blue are only available for the Futures and Options Segment and not for equity.

FAQs (Frequently Asked Questions)

1. What are cover order and bracket order?

A cover order is a two-legged order that consists of the initial market or limit order and a mandatory stop-loss.

A bracket order consists of three legs: an initial order, a stop-loss order, and a target order.

Learn about Bracket Order here. 

2. Can we set a target in cover order?

No, this is not possible. A cover order is a block order consisting of a single block. You can either close the complete set or change the stop-loss (of the complete set).