Online Share Trading: How Does it Work

Introduction

Investing in the stock market is gaining more prominence as more people get financially educated. However, more people learning about the benefits of investing is not the sole reason the number of investors in the stock market increases day by day. The stock market as an entity or system has also evolved. Traditionally, when one wanted to invest or trade in shares and other securities, they would have to obtain physical shares from the exchange. To get these shares, they would place an order through a broker. The broker would then go to the stock exchange, check the share prices and confirm the order with the buyer. After which, the broker would place bids and deliver physical share copies to the buyer.

What is Online Share Trading?

With the advent of the internet, buying and selling stocks and securities in the stock market has become a lot easier. Now, one can invest or trade shares online using a smartphone or a computer. You can place orders, modify them, and track your portfolio using just your phone. You no longer are dependent on your broker to go to the exchange and place the order on your behalf. This article will help you uncover how online trading works in India.

How Does Online Trading Work – Steps to Trade Online

• To start online share trading, you first need to open a Demat Account and a trading account.
• You need to link your bank account to your trading account to transfer funds. 
• After the authorities approve your accounts, you can start trading. To buy or sell stocks, open your trading application provided by your stockbroker on your smartphone or desktop.
• After opening the application, you first need to select the stock. Then select the buy or sell option, enter the number of shares, and enter the price you wish to buy or sell the stock. 
• When you place the order, the broker digitally delivers the order to the exchange, and if your order gets executed, you will receive the shares in your Demat Account. 
• You will receive the shares within T+2 days. T+2 days simply means that the delivery of shares or funds occurs within the next two business days post the trade date.

Demat and Trading accounts

These accounts are generally opened through an online stockbroker that is a registered trading member of the exchanges. The purpose of a Demat Account is to store shares and other securities digitally. At the same time, the function of a trading account is to buy and sell shares. You can open both these accounts online via the same stockbroker. Before you open an account, you should check the broker's fees.

How Does Online Trading Work – The Back End Process

So now you know what you need to do to trade online. But now the question arises what exactly happens at the exchange? How does online share trading work behind the scenes?

There are millions of buy orders and sell orders sent to the exchange. Suppose you place a buy order, and once your order reaches the exchange, the exchange looks for a matching sell order. So if you place a buy order to buy 20 shares of Company A at ₹500, the exchange will try matching it with a sell order selling 20 shares of company A at ₹500. Only if this match is successful will you get the 20 shares of Company A. Simultaneously, the seller receives the funds for selling 20 shares of company A.

Offline Share Trading vs. Online Share Trading

Back in the days when one had to trade offline, the trader was utterly reliant on their stockbroker to execute their trade. Whereas in the case of online share trading, you can place an order during market hours. Unlike offline trading, where you are dependent on the broker to reach the exchange on time to conduct the transaction, your order goes to the exchange instantly. 

The offline medium would force you to entrust your broker with your funds so that the broker could carry out transactions on your behalf. The broker kept your funds, so you had no way of knowing how the broker used them. The broker did not need your permission to buy and sell securities.  Often, brokers would conduct transitions without the knowledge of their clients. Neither did you have any knowledge of what went down at the exchange? If they felt that could benefit them, the brokers could simply choose not to execute your trades on a particular day.  It has even led to the client suffering losses in the past. 

The online stockbroker does not have the authority to place an order on your behalf. You decide and set the order. All the broker does is send your order to the exchange. Instead of keeping cash with the broker, transfer money in and out of your Demat Account when required. The NSDL and the CDSL are two depositories that offer Demat services via a stockbroker. It is also convenient to keep tabs on the funds and securities in your Demat Account.  

In the case of offline trading, brokers charged hefty fees to provide their service and their advice. However, you can opt for a discount broker if you feel competent and experienced enough to choose stocks and securities yourself. Discount brokers do not provide stock-buying but offer their services at very affordable rates. On the other hand, if you require stock recommendations, you can opt for a full-service broker. These brokers charge reasonable fees for their services. They provide research reports, stock recommendations, and consulting services. A trading application lets you track your portfolio and create multiple watchlists to track stocks and securities.  

Another major issue with offline trading was delivering and handling the physical share certificates. The broker could take several days to transfer the certificate to the buyer. At times, the broker could even misplace the shares. And after the delivery, the certificate holder had to take utmost care of it. Any damages could lead to future rejection of the certificate while trading. 

Now, the delivery of shares and funds takes T+2 days. The securities in your Demat Account get stored in dematerialized form with a depository. These depositories are secure like banks. And if, for whatever reason, your stockbroker shuts down, your shares and securities will still be secure in the depository. You could access those shares by opening another Demat Account. We hope this article helps you understand how online share trading works in India.

Conclusion

The online trading of shares has significantly reduced stockbrokers' influence over their client's assets. It has led to a reduction in malpractices by the stockbroker. The online share trading process is quick and reliable. The dematerialization of shares removes the stress of protecting and maintaining the physical copies of shares. The method of trading shares online has made trading activities more secure for retail investors and traders. Now retail investors can trade or invest in the Indian stock market from around the globe. It has helped boost confidence and has attracted many retail investors and traders to the stock markets.