Till now we have learnt market order ,limit order and stop-loss order . Cover order is a combination of this three orders. In this types of orders , you can buy (or sell) shares with keeping it as market price ,or limit price with a stop-loss order. You would also have to specify a Stop-Loss Trigger Price (STLP) . This is nothing but the stop-loss to avoid losses.
Let us take an example- suppose you want to buy a share however you want to buy it a limit price of your choice .Currently it is trading at Rs.50 you can place a cover order by keeping the buying price at Rs.48 and stoploss as Rs.46 .The moment stock comes to Rs.48 or lower than that your limit ordere will get executed & stop-loss order will be placed .In case if stock fall to Rs.46 this stlp will also get executed and you get the net profit and loss.
The benefit of cover order is your risk exposure in the market automatically get reduces. By using cover order, you are lowering your risk and ensuring that your losses are limited. Moreover you will enjoy additional leverage or margin in coverday . Depending up on your broker and security type you need to place the STLP as you get added leverage . You can place cover order only for intraday trades. To know what is intraday trading or day trading click here.