How Does Online Share Trading 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.

How Does Online Share Trading Function?

Online share trading works through a combination of technology, market infrastructure, and the involvement of investors and brokerage firms. Here's a step-by-step explanation of how it typically works

Step 1. Investor Enrollment

An individual interested in online share trading must open an account with an online brokerage firm. The registration process typically involves providing personal information, completing required forms, and agreeing to the terms and conditions.

Step 2. Account Funding

Once the account is set up, the investor must deposit funds into the trading account to have capital available for purchasing securities. This can be done through various methods, such as bank transfers, credit/debit card payments, or electronic wallets.

Step 3. Analysis and Study

Investors can access the online trading platform provided by the brokerage firm. They can utilize various tools and resources on the platform to research and analyze financial markets, individual stocks, or other securities. This helps in making informed investment decisions.

Step 4. Setting Orders

Investors can place orders to buy or sell securities through the online trading platform after researching. They specify details such as the type of security, quantity, price, and order type (e.g., market order, limit order). The platform relays the order to the relevant exchange or market for execution.

Step 5. Order Performance

The online trading platform routes the investor's order to the appropriate exchange or market where the security is traded. The order is matched with a counterparty willing to buy/sell at the specified price or better. The trade is executed, and the investor becomes a holder of the purchased security or receives proceeds from the sale.

Step 6. Confirmation and Settlement

Once the trade is executed, the investor receives a confirmation detailing the transaction details, including price, quantity, fees, and trade settlement information. Settlement refers to transferring ownership of securities and funds between the relevant parties, typically facilitated by clearinghouses or custodians.

Step 7. Portfolio Management

The online trading platform provides investors access to their portfolios, where they can monitor their holdings, transaction history, account balance, and performance. Investors can buy, sell, or hold securities based on their investment goals and market conditions.

Step 8. Additional Features

Online trading platforms may offer additional features, such as real-time market data, news updates, research reports, advanced order types, portfolio analysis tools, and educational resources to assist investors in their trading activities.

Investors need to understand the risks associated with online share trading, have a clear investment strategy, and stay informed about market trends and developments. Regular monitoring of investments and practicing risk management techniques are also crucial.

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.

Types of Online Trading

Stock Trading: Buying and selling shares of publicly traded companies through online platforms.

Forex (Foreign Exchange) Trading: Trading currency pairs in the global foreign exchange market.

Cryptocurrency Trading: Buying and selling digital currencies like Bitcoin, Ethereum, and others on cryptocurrency exchanges.

Options Trading: Trading contracts that give the right to buy or sell an asset at a predetermined price within a specific timeframe.

Futures Trading: Trading contracts for the future delivery of commodities, currencies, or financial instruments.

CFD (Contract for Difference) Trading: Speculating on price movements of various financial assets without owning the underlying asset.

Commodity Trading: Trading physical commodities like gold, oil, or agricultural products through online platforms.

ETF (Exchange-Traded Fund) Trading: Investing in ETFs representing a basket of assets through online trading platforms.

Online Trading Strategies

Day Trading: Buying and selling financial instruments within the same trading day to take advantage of short-term price movements.

Swing Trading: Holding positions for several days or weeks to profit from medium-term price fluctuations.

Trend Trading: Identifying and following the prevailing market trends to ride long-term price movements.

Momentum Trading: Capitalizing on strong price movements and high trading volumes to make quick profits.

Contrarian Trading: Going against the market sentiment to identify undervalued or overvalued assets for potential gains.

Scalping: Executing multiple trades throughout the day to profit from small price differentials.

Position Trading: Taking long-term positions based on fundamental analysis and holding them for an extended period.

Arbitrage Trading: Exploiting price discrepancies for the same asset on different exchanges to make risk-free profits.

Algorithmic Trading: Using pre-defined algorithms to automate trade execution based on specific conditions or strategies.

Hedging: Using financial instruments to protect against potential losses in existing positions

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.