What is online trading?

Online trading is the mechanism of buying/selling securities via the Internet.

Online trading process

The various transactions involved in online trading can be shown from the point of view of the

• Client
• Broker
• Stock Exchange

Benefits of online trading

This mode of trading has shifted the trading power from stockbrokers to individual investors. The advantages are that it:

• Ensures the best price for investors

This technique offers the best price for the buying and selling transactions of the investors, by ensuring proper matching of their orders within the communication network itself. Also due to the high level of transparency with regard to display of information relating to the specific stocks and company profiles, the investors will be able to get the best quote for the shares. This leads to a reduction in the transaction cost for the investors.

• Offers liquidity to the investors

Online trading offers 24-hour trading facilities or trading for longer hours when compared to the traditional stock exchanges. This provides added liquidity to the investors.

• Offers greater transparency

Online 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 stages are subject to inspection, thus bringing in transparency into the system.

• Enables hassle free trading

Online trading integrates the bank, the brokerage firm and the demat accounts, which leads to easy and paperless trading for the client.

• Allows quick trading

The investor will be able to execute the entire trading transaction, right from logging on to the broker’s site, to the execution and settlement of his bank account, in a very short period of time.

• Provides a level playing field

Trading on the net, gives even the smallest retail investor access to information that earlier was available only to the big traders. This provides a level playing field for all investors in the securities market.

• Reduces the settlement risk

This method of 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. In the case of a demat account (required for an online transaction), when a seller wants to sell the securities, his demat account is 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.