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Online Trading – How does online trading work?

India ranks second in the global list of number of internet users. After all, “Online” is the new place to be. Whether it is ordering groceries, buying furniture, paying your insurance premium or making travel plans, it can be done online these days. In fact, it is increasingly becoming the preferred mode of doing transactions. No wonder, by 2018 Indians had started consuming 1GB data daily as compared to 4GB per month earlier (Source: Nielsen India). And this is just the statistics for smartphones!

So, it comes as no surprise that online trading in India has also picked up momentum in the recent times. If you are seriously considering investing in the stock markets, then it is essential to find out about online trading.
What is Online Trading?

Online trading is the act of making buying and selling transactions for shares and other financial products through a digital or online platform. Anyone with an internet connection, trading account, bank account and sufficient funds can go for online trading.

The biggest advantage of this mode of trading is the convenience factor. You can buy or sell stocks and securities from the comfort of your home or even while on the go. Additionally, cumbersome paperwork is possible at the click of a button.

Online Trading in India
Online trading in India started in the year 2002. It has brought a paradigm shift in the trading environment. Automation of the trading process has significantly brought down the turnaround time and paperwork involved. It has streamlined the process and made it more flexible, simple and customer friendly.

Thanks to this wave of automation, the capital markets have witnessed a 1488% growth in the last decade. Mobile trading has also seen a solid jump in the recent years. Currently 10.15% of the average daily turnover on NSE is through this route. This is a growth of more than 800% in the last five years.

How does online trading work?
Majority of the stock market trading takes place on India’s two exchanges – National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Before you can understand how online trading works, it is important to understand the various involved components. In order to start online trading, one needs to do the following:

1. Demat and Trading Account

Anyone who wants to do online stock trading in India needs to have a trading account and demat account.

What is a demat account?
A demat account is an account which holds the shares or securities in an electronic format. A trading account facilitates the transactions (buying and selling) in the stock markets. All the buy or sell orders are placed through this account. The demat account is similar to a bank account in which all the debit and credit transactions are made.

Many service providers offer a 2-in-1 account which combines the benefit of an online trading and demat account. Some banks also offer a 3-in-1 account. This adds demat and trading facility to your savings bank account.
We will elaborate more on the steps to open a demat/ trading account in the later part of the article.

So, online trading account can be used for or margin trading, delivery based trading and derivative trading. It can also be used for investing in IPOs and mutual fund. However, demat account is not mandatory for making investments in Mutual Funds.

2. Depositories

There are two depositories that are registered with the SEBI- National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). They act as the custodian for dematerialised securities. They have the accountability of safe-keeping the securities/portfolio. Depositories provide their services through Depository Participants (DPs). Banks, trading members and financial institutions registered with SEBI can act as DPs.

3. Learn the stock market terminology

Before you begin to tango, you need to know the steps. Similarly, in order to do any online trading, one needs to be familiar with common terminologies and basics. The stock market works on the basic principle of demand and supply. One should keep a tab on financial affairs, market news, etc.

How to open a demat or trading account?

1) Reach out to a broker / Depository Participant:
The first step is to find a registered stock broker. Broadly speaking, there are two kinds of brokers:

a) Full Service Brokers:
These brokers offer a wide range of services in addition to stock trading. Such as financial research, market updates, tax planning and retirement planning.

b) Discount Brokers:
These brokers provide only trading facility. Due to their no-frills services, their charges are much lower as compared to full-service brokers.

While selecting a broker one should consider the following:

i) Account Opening Charges:
This is the amount charged for the opening of the demat or trading account.

ii) Account Maintenance Charges:
This refers to the annual fees for maintaining the demat or trading account.

iii) Brokerage:
Brokers levy certain fees for processing the orders (buy /sell) placed by the investors. The commission charged varies from one broker to another. They also depend on the type of transaction such as intraday transactions, transactions involving delivery, futures and options, etc. Some also offer discounts basis the number or value of trade conducted.

iv) Technical expertise and service record:
You should not blindly select the cheapest alternative. The quality and nature of service should be the most important criteria. If a particular stock broker has an exemplary service record, the higher brokerage charges may become justifiable.

2) Complete account opening formalities:

The broker provides the trading account application form. The same needs to be filled up and submitted with the necessary KYC documents. These include:
i) PAN Card
ii) Identity Proof
iii) Address Proof
iv) Cancelled cheque (for the account that will be linked to the trading account)
v) Bank statement for the last six months (only applicable for derivative segment trading)
vi) Photographs

Documents such as Aadhar, Driver’s License, Passport, etc. are considered valid for this purpose.

In addition to the application forms, you also need to sign a Power of Attorney (PoA) in favor of the intermediary/broker. This is required for the transfer of securities (margin purposes), settlement of trades and funds from the client's account and for recovery of the amount payable to the broker/DP.

After successful verification of all the details provided, the trading account details are shared with you for future reference.

There are many online stock trading websites. However, choosing the right one can make the entire process more streamlined, easier and lucrative for investors. IndiaNivesh is a well-known financial services partner in this domain. IndiaNivesh continuously keeps on changing and adapting as per the market sentiments and evolving customer needs. State-of-the art technological tools combined with an experienced team have been delivering customised financial solutions since the last 11 years. A range of services related to broking, institutional equities, portfolio management, investment banking, private wealth and corporate advisory are offered.

Final Words
If you keep all these points in mind, online stock trading can be a non-intimidating, easy and profitable income generator. And above all, you must remember that you must think long to get the best out of the stock markets. Patience is a virtue!

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.