Do Not Order (DNR Orders) Defined

Exchange-traded securities allow you to book profits and losses and mark your entry and exit in a particular trade. The order type you can place for exchange-traded securities help you understand which one to invest in based on your financial goals. This article details what is do not reduce order.

What is a Do Not Reduce order?

A dividend is the part of the profit a company distributes to its shareholders. A company’s share price decreases by the amount of cash dividend. Usually, the price drop adjusts the prices of the orders already placed. On the contrary, when orders are specified as a do not reduce (DNR) order with a specified price, it does not get adjusted when the security pays a cash dividend.

Do not reduce means the investor’s price conviction is not affected by the security’s dividend payment. If an order is specified as do not reduce or DNR, the price order remains unaltered to a dividend payment. Otherwise, brokers adjust the order price to reflect the change in dividend payment.

An investor opting for good ‘til cancelled (GTC) orders by default agrees to the adjustment in the order’s specified price because of the distribution of cash dividends. The price adjustment allows the order’s price to be in sync with the market activity. On the other hand, investors opting for do not reduce orders do not want their prices to adjust in line with the dividend payment.

Interestingly, the do not reduce orders are applicable only to cash dividends and not to stock dividends or rights.

How does Do Not Reduce orders work?

Investors willing to keep their specified price unchanged through the cash distributions of the dividend can avail of the do not reduce order option. The execution of the DNR order depends on one broker to another. An investor needs to tag a do not reduce order if they want their price to remain unchanged.

If an investor does not request the do not reduce order, it is treated as a good ‘til cancelled order by default, and the price is adjusted for the dividend payment. You can also adjust the price of your order back to the original level in case you miss placing a do not reduce order. However, this adjustment method is inefficient and is subjected to fulfilment of the order between the time of adjustment and when the trader manually adjusts it back.

Why place a Do Not Reduce order?

Dividend payments solely do not affect a security’s price. Suppose an investor is confident about other market activities to keep the stock price in line with their expectation irrespective of the dividend payment. In that case, an investor may choose a do not reduce (DNR) order. In the real world, the prices on ex-dividend dates might not reflect as the theories suggest.

DNR vs. GTC orders

Investors place the Good ‘til cancelled or GTC orders at their discretion. Do not reduce orders are typically requested by the investors when placing the GTC orders including:

1. Limit Buy Order: This is an order executed at or below a specified price. As the name suggests, the execution here refers to buying the security. This type of order allows the investor to control their entry point into any investments.
2. Limit Sell Order: This is an order executed at or above a specified price. As the name suggests, the execution here refers to selling the security. Limit sell orders help investors lock in profits.
3. Buy Stop Order: An order to buy a security at or above a specified price is known as the buy stop order.
4. Sell Stop Order: An order to sell a security at or below a specified price is called the sell stop order.

The above orders help investors manage risk while trading. Along with these orders, a trader or investor should request do-not reduce orders when a security pays the dividend, in case they want the prices to remain unchanged.

An example of do not reduce trade order

For instance, you place a good ‘til cancelled limit order to buy 50 shares of Reliance Industries Limited (RELIANCE) at INR 2,600. The stock closed at INR 2,605.05 on the day before the ex-dividend date. RELIANCE pays INR 8.0 in dividends annually. Theoretically, the stock price of RELIANCE drops by INR 8 as the dividend cash amount is no more a part of the company’s asset. This results in the opening price on the ex-dividend date at INR 2,597.05.

If you have specified the limit buy order as a do not reduce (DNR) order, your limit remains at INR 2,600. Otherwise, the price of your limit order falls to INR 2,592.