Online Trading

What is 'Online Trading'?

Online trading is the procedure of engaging buy/sell orders for financial securities and/or currencies with the use of a broker's internet-based exclusive trading platforms. The use of online trading has increased dramatically since 1980s. In India stock trading gained popularity after 1995 with the introduction of affordable high-speed computers and internet connections.

When shares are bought, and sold on a trading platform then the process is called stock trading

Stocks and bonds which are issued by the companies, options, futures, currencies and commodities can all be traded online.

Who is a stock trader?

A stock trader or equity trader or share trader is a person or company involved in trading equity securities. Stock traders may be an agent, hedger, arbitrageur, speculator, stockbroker or investor. A stock investor is an individual or company who puts money to use by the purchase of equity securities, offering potential profitable returns, as interest, income, or appreciation in value (capital gains). This buy-and-hold long term strategy is passive in nature, as opposed to speculation, which is typically active in nature. Many stock speculators will trade bonds (and possibly other financial assets) as well.

Stock speculators are often ambiguously categorized as stock traders, if trading in that capacity, as it sounds more acceptable to the general public. Individuals or firms trading equity (stock) on the stock markets as their principal capacity are often called stock traders. Stock speculators usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks.

Who is a Stock speculator?

The stock speculator is usually anexpert. Folks can call themselves jam-packed or casual stock traders/investors while maintaining other professions. When a stock speculator/investor has clients, and acts as a money manager or guru with the intention of adding value to their clients’ finances, he is also called a financial advisor or manager. In this case, the financial executive could be an independent expert or a large bank professional employee.

Who is an investor or a stockholder?

On the other side, stock investors are companies or persons who buy stocks with the purpose of keeoing them for an extended period, usually several months to years, for passive income objectives like dividend accumulation. They depend primarily on fundamental analysis for their investment decisions and completelyidentify stock shares as part-ownership in the company. Many stockholders believe in the buy and hold strategy, which as the name suggests, implies that investors will buy stock ownership in a corporation and hold onto those stocks for the very long term, generally measured in years.

Why should one trade stocks?

Trading in the stock market is the choice for many people. This investment approach, often exaggerated in flicks and TV shows, can be lucrative if done appropriately. If you and your partner are considering dipping some of your hard-earned currency into stocks, it's important to look at some of the biggest reasons for taking the dive.

Make Money Straightaway

While most folks use stock market as an investment activity, some use it to make income. These individuals buy and sell stocks often, getting in when the stock price is stumpy, and selling the shares as they grow. These individuals are usually called "intra-day traders." While employed in this capacity may seem like a good option, it comes with a significant risk and there is no guarantee of sturdy income. Choosing this type of trading action is particularly thought-provoking if you intend to have a family with your new partner, as a long-term stock market fall—or anill-timed high-rupee trade—could drop a bomb in the form of financial disaster for your young family.

You Can Build for the Future

Most stock traders are in it for a long time and are working to build a shell. Normally, you will see the largest return with the least effort by buying stocks when they are low and allowing them to increase steadily over time. This type of trading is particularly lucrative if you happen to buy on the ground level of a firm that eventuallyprospers. Just imagine if you had been around to invest in Reliance, for instance, during its infancy, your share would have grown about 35000% or say if you had invested in Maruti or MRF Tyres you would been able to a Villa for yourself. If you elect to buy stocks in this manner, you will still need to monitor stock performance, but not as closely as if you were engaged in intra-day or agressive trading.

Diversify Your Portfolio

By mixing stock trading into your investment plan, you can craft a diversified portfolio however this a difficult task as normal people do not have a proper knowledge about Portfolio management which involves studying many factors which might include correlation between the sectors for a start. Most financial advisors recommend a diversified portfolio, because it's an important defence when one of the stock falls, because other stocks would still be able to give you positive return and in the worst case at least neutralise your portfolio rather than giving you losses. By trading stocks, along with buying mutual funds and bonds and investing in a retirement plan, you can ensure that you don’t put all your eggs in one basket.

Best way to learn about Stock market investment

Budding investors taking their first steps towards learning the basics of stock trading should have access to multiple sources of quality education. Just like swimming, trial and error coupled with the ability to keep forward will ultimately lead to victory.

One great advantage of stock trading lies in the fact that the game itself lasts a lifetime. Investors have years to develop and hone their skills. Strategies used twenty years ago are still utilized today. The game is always in full force.

If you are a new investor wanting to take first steps, here are some initial steps that might help you in making money in the securities market in the long run:

1. Open a stock broker account

Find a good stock broker and open an account. Become familiarized with the layout and to take advantage of the free trading tools and research offered to clients only. Some brokers offer virtual trading which is beneficial because you can trade with play money (see #9 below).

2. Read books

Books provide a wealth of information and are inexpensive compared to the costs of classes, seminars, and educational DVDs sold across the web.

3. Read articles

Articles are a fantastic resource for education. Recommended websites for investment education are investopedia.com and of course Google search.

4. Find a mentor

A mentor could be a family member, a friend, a past or current professor, co-worker, or any individual that has a fundamental understanding of the stock market. A good mentor is willing to answer questions, provide help, recommend useful resources, and keep spirits up when the market gets tough. All successful investors of the past and present have had mentors during their early days.

5. Study the greats

Learning about the greatest investors of years’ past will provide perspective, inspiration, and appreciation for the game which is the stock market. Greats include WarrenBuffett, Jesse Livermore, George Soros, Benjamin Graham, Peter Lynch, John Templeton and Paul Tudor Jones, among others. One of my favourite book series is the Market Wizards by Jack Schlager.

6. Read and follow the market

News sites such as Yahoo Finance and Google Finance serve as a great resource for new investors. For in depth coverage, look no further than the Money Control. By monitoring the markets each day and reading headline stories investors can expose themselves to trends, 3rd party analysis, not to mention economic concepts and general business. Pulling quotes and observing fundamental data can also serve as another good source of exposure.

TV is another way to monitor the market each day with CNBC being the most popular channel. Even turning on CNBC for 15 minutes a day will broaden an investor’s knowledge base. Don’t let the lingo or the style of news be a nuisance, just simply watch and allow the commentators, interviews, and discussions to soak in. Beware though, over time you may find that a lot of the investing shows on TV are more of a distraction and are overall full of junk recommendations. This is a natural evolution; you are not alone!

7. Consider paid subscriptions

Paying for research and analysis can be both educational and useful. Some investors may find watching or observing market professionals to be more beneficial than trying to apply newly learned lessons themselves. There is a slew of paid subscription sites available across the web, the key is in finding the right ones for you.

IMPORTANT – Be careful. Many paid subscriptions come from independent traders and services that claim to have fantastic returns and can “teach” you how to be successful. 99% of them are a scam and come with higher prices of Rs 10000 per month or more.

8. Go to seminars, take classes

Seminars can provide valuable insight into the overall market and specific investment types. Most seminars will focus on one specific aspect of the market and how the speaker has found success utilizing their own strategies over the years. Not all seminars have to be paid for either. Some seminars are provided free which can be a beneficial experience, just be conscious of the sales pitch that will almost always come at the end.

9. Buy your first stock or practice trading through a simulator

With your online broker account setup, the best way to get started it to simply take the plunge and make your first trade. Don’t be afraid to start small, even 1, 10, or 20 shares will serve its purpose of getting you in the game.

If trading with real capital is not possible initially, consider using a stock simulator for virtual trading. One of the most common mistakes traders make is to go all-in and try to score big with a full portfolio position out of the gate. This is an often-painful mistake and why many new investors suffer big losses early on. Proper portfolio allocation is extremely important.

What is a de-mat account?

A De-mat account is opened by the investor while registering with an investment broker (or sub-broker). The Dematerialized account number is quoted for all transactions to enable electronic settlements of trades to take place. Every shareholder will have a Dematerialized account for transacting.

A de-mat account is similar to a bank account, the difference being whereas the latter stores your money, the former stores all the shares that you have bought.Simply put, it is the account that holds all your shares in electronic or dematerialized form. Like the bank account, a de-mat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs). You cannot trade in the stock market without a de-mat account.

Technology has brought about a drastic change in our everyday lives. The stock markets too have not been left untouched by the change. In 1875, the Bombay Stock Exchange was founded with an open outcry floor trading exchange. Traders would stand on the floor and shout prices of stocks for buying or selling. Then, money would be exchanged for physical receipts of the shares called the certificate. This led to a great amount of paperwork. Even the settlements of trade agreements took time because of the need to deliver the share certificates.

In 1996, dematerialization was embraced. Dematerialization is the process by which physical share certificates held by an investor are converted into an equivalent number of securities in electronic form and credited into the investor’s de-mat account.

Benefits of dematerialization:

There are several benefits associated with the De-mat system:

  1. It is a safe and convenient way to hold securities.
  2. It ensures immediate transfer of securities.
  3. There is no stamp duty on transfer of securities.
  4. Risks associated with physical certificates such as bad delivery, fake securities, delays, thefts, etc. are eliminated.
  5. There is a major reduction in paperwork involved in transfer of securities, and reduction in transaction cost, etc.
  6. No odd lot problem exists; even one share can be sold.
  7. Change in address recorded with DP and gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
  8. Transmission of securities is done by DP eliminating correspondence with companies.
  9. Automatic credit into demat account of shares; arising out of bonus/split/consolidation/merger etc. can take place.
  10. Holding investments in equity and debt instruments in a single account is possible. Besides the above benefits, there are some additional advantages listed as below:
  11. Dematerialization is not just for shares, but also for debt instruments like bonds. Now, you can hold all your investments in a single account.
  12. Dematerialization has also eliminated the risks of fake shares, thefts, deliveries gone wrong, and so on, and reduced the paperwork involved. Time of delivery has also reduced drastically. Once your trade is approved, the securities are automatically credited to your account. This applies to other company-related activities like stock splits, stock bonuses, and so on.
  13. Earlier, when you transferred the securities, you incurred extra costs due to the stamp duty. This is not a problem with the de-mat form.