Online Trading

The process of buying and/or selling financial securities, currencies and commodities through the Internet is known as online trading. For this purpose of trading online, investors need to exercise patience as well as use the right proprietary softwares provided by several brokers.

Online trading is an internet based investment activity which does not involve any direct involvement of the broker. There are several leading online trading portals in India along with the online trading platforms of the biggest stock houses like the NSE and BSE. The total section of online share trading in India has been found to have grown from only 3 per cent of the total turnover in 2003-04 to 16 per cent in year 2006-07.

How to Trade Online

The investor needs to register with an online trading portal and get into an agreement with the firm to trade in different securities as per the terms and conditions listed down in the agreement. The order processing is done in correct timings since the servers of online trading portal are connected to the stock exchanges and designated banks all round the clock. Updates can be received on the trading and investors can check the current status of their orders either through e-mail or through the interface. Brokerages also provide research content on websites, so that the clients can take their own decisions on the stocks before they invest.

Thus in online trading, orders are implemented through online trading platforms offered by various brokers. Investors place their orders directly on a broker's site. The broker then executes the orders on the stock exchange and also makes payments on behalf of the clients. Brokers also provide clients with information related to market data, news and charts through their online platforms. This is done to help them in making informed decisions. Brokers charge software usage fees and trading commissions for their services. An investor is able to trade in more than one product/market through the same account and software.

Benefits of Online Trading

• Transparency: Online trading provides transparency on all the information related to the time of order placement till the final settlement. Every step of online trading is subject to scrutiny, since this provides transparency to the trading process.

• Best prices: Investors, by way of online trading, can get the best quotes for securities because of high transparency in the system.

• Added convenience and liquidity: One can carry out online trading anytime during business hours. This also helps in providing liquidity to investors.

• Low commissions: Investors can make transactions frequently, without the need to worry about the burden of commissions; thus making day trading and short-term trading more feasible.

• Technology problems: Delays in transactions may be caused due to Internet connection outages or power failures.

• A mentor's absence: As there is no guidance from professionals, online trading may involve formulation of improper trading strategies which in turn would lead to huge losses

• Overtrading: Online traders usually have a long term strategy before investing. However, the attraction of capitalizing on short term movements might make them buy and sell more often. Since the commission levels in online trading are low, investors are lured into day trading. This takes them away from their well-researched and long term trading strategy, causing great losses in the long run.

Tips for Online Trading

• Set limit orders on trading of stocks.

• Avoid overtrading. Do not trade a several stocks at one time.

• Do not form decisions based on daily ups and downs.

• Observe long term trends.

• Stay away from trading based on rumors.

Online trading is an excellent tool to earn a living and to supplement regular income. However, before venturing into online trading, an investor must carefully research on the risks associated with online trading and must be prepared for the same before investing.