In our previous article "An introduction to Online trading - part I" we have given you a brief about online Trading such as types of Online Brokers, features of online trading, etc. In this Article we are providing you much advanced information about Online trading. Because of the advancement in technology online trading has become more user-friendly in it helps to trade more conveniently. This article will help you to know more about online trading.
An investor who is interested in trading through Internet has to register himself with an online brokerage firm. Some formalities such as filling the account opening form, copies of identity proof, residence proof, etc. are made to register with the e-trader. Secondly, the investor would be required to open a bank account with a scheduled bank and adequate balance should be kept in the account. Thirdly he would be required to open account with a depository participant (DP) because only dematerialized shares can be traded on Internet. Below given structure shows the working of online Trading;
The client places order via net by logging on to his Broker’s site
The broker accepts and executes the order and places it with the exchange
The exchange accepts the order after checking the share limit for the day.
The broker makes the payment either directly through the client bank account or
pays through its own account and recovers it later from the client.
The exchange receives money and completes the settlement.
The client is intimated about the settlement either through demat or through e-mail.
Steps in Online-Trading
Generally following steps are followed while doing the trading through the Internet
Those investors interested in doing the trading over Internet system should approach the brokers and register with the Stock Broker.
After registration, the broker will provide you a login name, password and a personal identification number (PIN).
In the third step you can place an actual order using the place order window. Below given is the method of placing an order through online.
- Enter the symbol and series of stock and other criteria such as quantity and price of the scrip on the place order window.
Fourth step is the process of review. Here the investor has to review the order placed by clicking the review option. You can also re-set to clear the values. Once the review is done satisfactorily, the order has to be sent to the broker.
In the fifth Step the exchange receives money and completes the settlement. The client will be informed about the settlement either through demat or through e-mail.
In this step the investor will receive an "Order Confirmation" 'message along with the order number and the value of the order.
In case if the order is rejected by the Broker or the Stock Exchange because of certain reasons such as invalid price limit, an appropriate message will appear on the screen. At present, a time lag of about ten seconds is there in executing the trade.
Eighth step is related to the mode of payment. There are different modes of payment some brokers will take some advance payment from the investors and will fix their trading limits. When the trade is executed, the broker will ask the investor for transfer of funds by the investor to his account.
Benefits of online trading
Following are the major benefits of Online Trading
- Less Costly
- Greater Convenience
- Keeping Records
- Access to Information and investment Tools
- Reduces the settlement risk
- Offers greater transparency respond
- Ease of trade
The most important advantage of Online Trading is the cheapest brokerage. Due to the power of Internet you have the opportunity of becoming the client of large brokerages it will help you to enjoy the low charges which as before enjoyed only by the big players.
Online Trading allows you to trade according to your convenience; you can trade by sitting at your home, office, anywhere. Online Trading makes away the hassles of filling up instruction slips, visits to the broker for handing over these slips and consequent costs.
The broker you are trading with keeps a record of all your transactions such as executed orders, unexecuted orders, cancelled orders, etc. No paperwork needed to keep the track of your trading; this gives you more time for research and analysis.
Access to Research Reports and investment Tools
Most online trading sites have a wealth of information for their registered members. This includes research reports, results, analysis and all other company related news in the market.
The bank account linked with the trading account always has an ATM free. Most partner banks offer Internet banking as well. This results in one’s money becoming available to him whenever he likes to withdraw from his trading account.
Most of the online trading sites are protected using 128-bit. Moreover even if somebody broke the security system and tampered into one’s account, the money from the stocks he sold or bought will be in his account only.
Reduces the settlement risk
Online trading reduces the settlement risk for the investor, as in this case no Short sale is possible i.e. the seller will not be able to sell the securities unless he has their actual possession. When a seller wants to sell the securities, his demat account will be checked by the Depository Participant before executing the sale transaction. This reduces the settlement risk for the buyer, who is assured of the delivery of the securities.
Offers greater transparency
This Kind of trading gives greater transparency to the investors by providing them an audit trail. This involves a complete integrated electronic chain starting from order placement, to clearing and settlement and finally ending with a credit to the depository account of the investor. All these points are subject to inspection, thus bringing in transparency into the system.
Ease of trade
With the help of Online trading you can buy or sell any share (that is dematerialized) with a click of mouse. Apart from the above-mentioned advantages, Internet trading provides some additional advantages to the investors, brokers and also helps the nation to channelize the resources. The whole communication between the investor, broker and exchange would take place within milliseconds.
Drawbacks of Online Trading
Following are the major drawbacks of Online trading
- Server Problems
- Connectivity of the Broker with NSE
- Cyber attack
- Non-availability of a seamless interface
- Non- availability of personalized advice
- Little use of advisory services
Server Problems may appear on your screens when you are desperately trying to get out of an unprofitable position. Some of the online sites are providing a telephone number to use in case their sites are overloaded or their server down.
Broker and NSE Connectivity
This problem is rare but be aware of its possibility. In such condition you won’t be able to place or execute any transaction.
In the event of a harmful attack on your broker systems, you will be protected only if the company is taking proper precautions against such attacks. You may like to choose a brokerage that has a stated security policy and contingency plan in place.
Non-availability of a seamless interface
As a client you can access the NSE through a server of the online brokerage and this may involve queuing delays. If a number of clients access the server the server will take its own time to send orders to the Stock Exchange server. One must check out the seamlessness of this interface before selecting an online brokerage. The faster the orders are processed the more seamless is the interface.
Lack of personalized advice
Online Trading doesn’t provide personalized advice to its clients. If you want to ask your broker about any particular stock he may not even be able to get that.
Little use of advisory services
The advisory services being promised by the brokers would be of little use to the investors those who are looking for an insight into the market. Many would not like to depend on the research reports, which are there for all. So, net investors will have to do their own research and take their own decision, whether wild or wise.