Summary
A GTT order is a conditional stock order that stays active until either a certain price condition occurs or the order itself expires. Unlike other standard orders, you do not need to continually monitor the markets to carry out transactions. This blog post will guide you through understanding what GTT order is, how it works, its types and most importantly, how investors can leverage it to their advantage effectively.
Introduction
Financial markets move quickly and investors need tools that allow them to capitalize on opportunities even when they are away from their desks. The GTT order does exactly this for you by placing conditional orders at a pre-determined price level in the markets.
What is a GTT order?
A GTT order is a conditional trade instruction placed by an investor, which is valid until the trigger price is reached or until the order lapses as per the brokerage’s policy (usually up to 1 year). A GTT order is valid for multiple sessions unlike a regular market or limit order which is valid only for a trading day. In short, a GTT order lets you automatically place a buy or sell order when a stock reaches the price you have indicated.
Types of GTT Orders
Investors have two main types of GTT orders to choose from:
1. Single Trigger GTT Order: This type of order is relatively simple to execute as there is only one price condition that needs to be specified, such as buy at a certain price or sell at a certain price level. The order is placed as soon as the specified price is reached.
2. OCO (One Cancels the Other) GTT Order: This relatively advanced GTT order allows for the specification of two different price conditions, usually a stop-loss price and a target price. In case one of the orders gets filled, the other one is automatically cancelled. The order can be especially useful for those investors who are interested in protecting their investments while being involved in profitable trades.
How Does a GTT Order Work?
The mechanism behind a GTT order involves the following 2 steps.
First, the system places a limit order for you once the price of a stock reaches or surpasses the price you have chosen. Then, that limit order is then sent to the exchange to be filled at or near the limit price you specified.
For instance, the value of a particular stock is ₹500, but you intend to purchase the same stock only if its value drops down to ₹450 since you think it will be undervalued. You make a GTT buy order with a trigger price of ₹450 and a limit price of ₹452. Once the value of the stock reaches ₹450, a limit order will be initiated by setting the limit buy order at ₹452. Once there is a willing seller of the stock at ₹452, then the transaction takes place.
In another case, where you have a stock whose value is ₹500, but you desire to sell the same if its value rises to ₹600. In such a case, you will make a GTT sell order with the relevant trigger and limit prices.
GTT orders should also be understood as not necessarily being executed. It might happen that the price of the stock moves fast beyond the trigger point and does not allow placing the order, or that there is no sufficient number of counterparties available at the specified limit price. Moreover, GTT orders do not adjust themselves for any corporate actions like stock splits, bonuses, or dividends.
When Should You Use a GTT Order?
GTG orders work best in the following situations, where one should place such orders.
- When there is a target price for buying: In case you monitor the stock and already know the price level up to which you wish to buy, placing a GTT order enables you to be part of that action without watching your computer screen all day long.
- When you are disciplined in selling: Investors who are not able to sell shares at the desired price because of greed and other market considerations find it helpful by using GTT orders. It executes orders automatically once the pre-set price is reached.
- To safeguard from losing money: When you are ready to take some positions but wish to protect yourself from losses by setting a limit on them (stop-loss mechanism), then GTT orders can help in minimizing the risk.
- Investing in stocks casually: Individuals who are investing in stocks part-time or on an irregular basis may consider placing orders through GTT in the share market.
Benefits of Using GTT Orders in Investment Strategies
There are some significant benefits associated with the inclusion of GTT orders within the trading strategy:
- Convenience and Automation: These are the most important benefits of this method. Once created, the order executes itself and removes the need for manual timing and intervention in the process.
- Emotional Control: Fear and greed affect the decisions of investors in the markets; however, with the help of a pre-decided GTT order, investors always make logical choices based on prior calculations and not emotions at that point in time.
- Efficiency: A GTT order saves the time of investors who are unable to continuously monitor their portfolios because this method allows investors to monitor the price throughout the day (9:15 AM to 3:30 PM IST).
- Flexibility: There are two types of GTT orders: single and OCO orders. Both orders can be used for various purposes, including gradually acquiring positions, taking profits gradually, and securing a portfolio against possible losses.
Potential Pitfalls of GTT Orders
GTT orders, despite their several merits, carry risks that investors need to be aware of:
- Guaranteed Fill Issue: GTT orders will only cause the execution of the limit order. In some instances, especially when the market changes too quickly, the price may not be favorable enough to fill the order despite hitting the trigger point.
- Adjustments due to Corporate Actions: Dividend announcements, rights offerings, and even share splits by the companies will adjust the prices. A failure to readjust the GTT order will cause losses or missed opportunities for profitable trading.
- Over-Dependence on Automation: The use of automation in the execution of orders can work very well. However, depending fully on this approach without evaluating its effectiveness from time to time can be counterproductive.
- Execution Issues: Such orders may cause partial fills or failures in filling the orders completely. In particular, for smaller and relatively less liquid stocks, hitting the trigger point will not guarantee that there will be a counterparty willing to transact at the limit order price.
Conclusion
GTT order is a highly complex but user-friendly method of ensuring disciplined investment while simultaneously considering the constraints of time. By learning about what GTT means in the share market, investors will gain the ability to automate their entry and exit, exercise emotional discipline and even safeguard their investments without having to constantly track the market. Nevertheless, the usage of GTT orders should also be accompanied by regular check-ups, awareness of corporate actions, and overall investment plans to fully utilize this valuable financial tool.
Final Takeaways
- The GTT order is a type of order that will stay in effect until the certain price level is met. Thus, there is no requirement to keep track of the markets daily.
- There are two kinds of GTT orders – single trigger and one cancels the other. The advantage of GTT orders is that it offers flexibility in terms of entry and exit strategies.
- The GTT order is very valuable for a long term investment strategy, but its use requires careful analysis because dividends, bonuses, and stock splits may affect the conditions set up initially.
- To benefit from GTT orders in the stock market, it is necessary to take care not to commit typical mistakes in connection with GTT order use.
