ABOUT ONLINE TRADING

INTRODUCTION TO ONLINE TRADING

The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading Volumes and efficiency.

In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully-automated screen based trading system(SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency.

It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enables market Participants, irrespective of their geographical locations, to trade with one another Simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety.

This sucked liquidity from other exchanges and in the very first year of its operation, NSE became the leading stock exchange in the country, impacting the fortunes of other exchanges and forcing them to adopt SBTS also. Today India can boast that almost 100% trading take place through electronic order matching.

Technology was used to carry the trading platform from the trading hall of stock Exchanges to the premises of brokers. NSE carried the trading platform further to the PCs at the residence of investors through the Internet. This made a huge difference in terms of equal access to investors in a geographically vast country like India.

Online trading is a new and upcoming phenomenon, which is now become a popular means of trading due to convenience of use. It’s a sea change that has been brought about in equity markets. With E - trading sites now sprouting all over the place, even small retail investors with sum as low as Rs.5000 to invest, now have the ability to buy stocks directly from the stock market even in odd lots at a fee that even large brokers didn’t match for their institutional clients until recently..

Thanks to dematerialisation of stocks, one can now buy even one share of any stock at a cost that can be as low as 0.05% of the trade value. E – Trading also does away with the tedium of having to physically tender cheques for every purchase and deposit cheques received for every sale. The payments gateway lined up by these sites also ensures that the transfer of funds between your bank and the brokerage account is done online.

Using the net, investors now have access to the latest news from diverse sources and online market commentary for free. The democratization of information has empowered investors to choose and adopt a trading and investing style best suited to their risk returns, aspirations and skill levels. What is crucial how ever is how the investors shift through these tons of information and use it for their benefit.

The Internet revolution has been changing the fundamentals of our society. It shapes the way we communicate and the way we do business. It brings us closer and closer to vital sources of information. It provides us with means to directly interact with service-oriented computer systems tailored to our specific needs; therefore, we can serve ourselves better by making our own decisions. This prevailing shift of the business paradigm is reshaping the financial industry and transforming the way people invest.

What is online trading?

Online trading allows you to buy and sell shares on the exchange through internet. It is truly powerful medium to be in direct control of your investments.

The Internet revolution has been changing the fundamentals of our society. It shapes the way we communicate and the way we do business. It brings us closer and closer to vital sources of information. It provides us with means to directly interact with service-oriented computer systems tailored to our specific needs; therefore, we can serve ourselves better by making our own decisions. This new access by the online trading customers to low-cost transactions and cutting-edge, real-time market information that formerly belonged only to brokers has opened up extraordinary new investment opportunities as well as a crucial need for state-of-the-art information.

Today, investors can use revolutionary Internet Client-Server technology to buy and sell stocks nearly anywhere, anytime…

Why should we invest online?

Today investors can use revolutionary internet client technology to buy and sell nearly any where, any time.Online investing - the term used to conjure up images of risk-taking individuals hunched over home computers, navigating mysterious byways of the stock market. But no longer…Online investing has reached mainstream proportions. With Internet transmission times of less than a second to anywhere in the world, dealing over the Internet is faster. So anyone not yet surfing the tidal wave of online investing might well ask, "What's in it for me? What are the advantages of online investing?"

What are the advantages & disadvantages of online investing?

Online trading allows you to buy and sell shares on the exchange through internet. It is truly powerful medium to be in direct control of your investments.

ADVANTAGES

1. Easy access to information and research: Internet brokerage houses offer easily accessible company information, investment advice, counseling on how to profitably invest and better manage an investor’s portfolio and verify the various portfolios and verify the various tips got from various sources.

2. Markets on the Desktop: Investors do not have to go to take the trouble of going to the stock exchange or to his brokers office, the investor has got all the requires on his desktop.

3. Portfolio Management: Investors can track their portfolio performance, that is , it is faring in the market. If the portfolio is not performing well investors can get advice on restructuring it.

4. Best Price: Online trading has resulted in phenomenal reduction in the transaction cost for the investor as online trading ensures a matching of buying and selling orders within an ENC without the intervention of market markers or traditional stock exchanges.

5. Liquidity: The liquidity options available for investors have been considerably stretched as the online trading offers 24 hour trading facilities.

6. Audit trail: online trading has imparted greater transparency which is subject to scrutiny, by providing an audit trail for an investor right at his desk, which earlier, used to stop at his brokers trading terminal. The integrated electronic chain, staring with the order-Placement- clearing and settlement function and ending with the credit to the depositary an account of the investor is largely a transparent process

7. Benefit of Saving: Individual investors can save a lot more through online trading as the cost per trade while trading online is less.

8. Variety: Individual invest in variety of products, unlike earlier when investor brought bonds, mutual funds and stocks for long term basis and sat on term. Now individuals can invest in stocks, stock options, mutual funds, individual, government, corporate, municipal bonds, various types of IRA account mortgages and even insurance

DISADVANTAGES

A few of the possible disadvantages of online trading can be noted as follows:

1. Speedy Net Connection: One of the most important requirements for investor whi9le trading online is the need for fast internet connection as time is of essence while trading. This has not yet been well established in India.

2. Guidance: Individuals are restricted to first hand guidance; the individual is the one to make their own decision, online trading doesn’t help investors while decision making as a broker can.

3. Crashes: If the network crashes, there will be problems and delays due to large influx to traffic and rapid online trading criteria.

4. Communication Links: There is need for more effective communication links over the internet and the ability of the server to deal with a large volume of visitors.

Growth of Online trading

Online trading booms in India

Online trading is gaining momentum with trading volumes growing by 150 per cent per annum. Over the past two years, the value of all trades executed through the Internet on the National Stock Exchange has grown from less than Rs 100 crore (Rs 1 billion) in June 2003 to over Rs 700 crore (Rs 7 billion) in July 2005.

There has been a massive rise in the number of Internet traders. At the end of July 2005, there were 108 registered brokers on the NSE, and about 1.054 million Internet trading subscribers. However, the top three players, ICICIdirect.com, Indiabulls and Kotak Securities, command nearly 85 per cent of the total customer base.

ICICIdirect.com, the largest trading portal, has over 675,000 customers. In March 2003, the firm had about 234,000 customers trading through its portal.

"Being the first player to enter the online trading segment, ICICIdirect has made broking more structured and transparent, reducing the operational hassles," ICICIdirect.com.It expects online business to grow around 80-100 per cent in the coming year.

Kotak Securities, "The number of subscribers trading through our portal has gone up significantly by 150 per cent and we expect this growth rate to continue."

Over the past one year, the number of subscribers to kotakstreet.com, Kotak Securities' online trading portal, has grown from 30,000 to 75,000. It expects kotakstreet.com to have at least 130,000 customers by the end of this fiscal.

Similarly, Indiabulls, a relatively late entrant in the game, has been on the fast track with its online customers growing from 35,000 in June 2003 to over 140,000 at present.

"Being the third entrant -- next to ICICIdirect and Geogit Securities Limited -- Indiabulls has expanded to 90 different cities and towns with 135 offices that deal only in equities," says the company's executive director Gagan Banga. The firm has a client base of 180,000, a bulk of whom are online customers.

Indiabulls has scaled up its operations to cater for its growing customer base. Currently, there are around 2,000 relationship managers to handle online clients, adds Banga.

Sharekhan, the retail broking arm of Mumbai-based broking firm SSKI, has 250 centres across 123 cities and towns in India and offers its online services through its site sharekhan.com, which was launched in 2000.

Sharekhan "Online trading represents 30 per cent of Sharekhan's broking business. The number of customers registered with Sharekhan is 130,000 currently, of which 60,000 use Internet trading."

Despite the rapid growth, online trading constitutes a puny 8-10 per cent share of the total turnover on the NSE, although this is up from 2-3 per cent about two years ago. The biggies in the online business are very optimistic about growth going forward. They anticipate a 100 per cent growth in their subscriber base every year for the next few years.

Simplicity, convenience and greater reliability have put online trading on a high growth trajectory. However, even now, many investors prefer to trade through traditional brokers as they get "hot tips".

But industry experts believe that online trading will take off in a big way in the years to come.