Most brokerage firms, apart from conventional trading platforms, also offer the option of online trading. In this article we are out lining the features of internet based trading and its pros and cons.
The Indian stock market has evolved dynamically over the past decade, making the system more transparent and efficient. The number of demat accountholders have also gone up by leaps and bounds over the past few years. An increased awareness of investing regularly has also led to people flocking to brokerage firms to get a trading account opened.
Now, with more and more investors getting net-savvy, slowly and steadily the concept of online trading is gaining momentum. Just like online banking helps investor to conduct his banking transactions on the internet, similarly, online trading helps investor make his investments on the ‘world wide web’.
Internet trades account for approximately 11 per cent of the total number of trades conducted and this figure is expected to grow to 25 to 30 percent over the next three to five years.
By 2010, 90 per cent of the retail trading volumes will be drawn towards the Internet. There are more than 5,000 online trading accounts opened every month in India and identifying the growth opportunities of this paperless platform for trading, many banks have lined up ‘three in one’ accounts, which includes a savings account, a demat account and an online trading account, enabling swift trading and transfer of funds. All the three accounts are seamlessly woven to ensure a completely paperless mechanism for trading and to facilitate smooth transfer of funds to and from investor’s bank account.
There are two ways in which one can trade in stocks – offline trading and online trading. Offline trading, the conventional method of trading, involves instructing the broker to execute the trade on investor’s behalf. This leads to higher dependency on the broker. As against this, online trading provides investor a platform where investor is in total control of the trading in stocks and all orders are executed by investor him self. Investor can transact as per his comfort and availability of time, as there is no third party involvement to book the trades. What’s more, since trading takes place on the internet, investor has the flexibility to operate his account from anywhere across the globe.
Under the conventional trading mode, there might be a time lag between placing an order and its execution. This may even result in buying a stock at a higher cost, since share prices fluctuate all the time. In online trading, investor can book the trades instantly. Moreover, the system asks for confirmation of the trade before the final order is booked and this ensures a re-checking of the figures before booking the order, reducing the margin of error significantly. Online trading operates on a paperless environment, with trade confirmation being sent across through e-mail. However, investor also has an option to request for a physical copy of the ‘contract note’.
Investor online trading account comes with features that enable investor to view a certain number of stocks at one go. For instance, Indiabulls Securities’ trading account allows its online clients to view live quotes on the streamer for a set of 30 stocks. What’s more, investor can view the quantity and type of stocks held by investor and their respective market prices at one go, do technical analysis of stocks, and browse through the financials of any company that investor want to invest in, as service providers maintain an online database.
Additionally, the status of any trade can be accessed by viewing the trade status, unlike offline trading, wherein investor have to call the broker at regular intervals or wait for the broker’s call for confirmation of trades.
For any investor, the cost involved in opening and maintaining an online account and the brokerage applicable on trades is of prime importance. More or less, the brokerage charged by firms providing online trading is equivalent to that of offline trading, with a similar rate reduction on brokerage, with a subsequent increase in trading volumes. As of now, online trading might not be cheaper as compared to offline trading, however, experts feel that over a period of time, the internet platform will take over the offline mode and prices will eventually come down.
Online trading comes with sophisticated layers of security. For example, ICICIdirect.com, one of the pioneers in internet trading, provides the highest security with 128KB encryption standards.
Apart from the convenience that the web-based trading platform provides, there are other aspects investor needs to consider before zeroing on a broker for online trading. These are – a strong independent research service, the trading limit offered in a day, real time information updates, technical analysis’ tools, transaction execution speed, absence from involvement in any kind of scam, the number of ongoing and pending cases with SEBI if any, and a clean legal track record.
Despite all the advantages that online trading offers, it also suffers from inherent disadvantages like the lack of personal touch and professional advice before investing. For intraday trades, the positions are squared off by the online system around 15 to 20 minutes before the market closure time. Moreover, if investor internet connectivity is slow, and if investor wants to carry out an urgent trade, he can stand to lose. Further, investments in stocks require constant monitoring and reviewing. In the absence of professional help, investor may lose track of his investments.
The online share trading platform is well poised to become the preferred choice of trading, with a steady increase in the percentage of online traders. Moving forward, the brokerage charged by service providers may also experience a paradigm shift from the individual transaction based brokerage to a fixed commitment on brokerage irrespective of the volumes, thus spicing up the competition and attracting more customers to adopt online trading.