Beginners Guide for Online Stock Trading

Online Trading Guide - Beginners Guide for Online Stock Trading

Technology advancement has changed many sectors over the last two decades and has acted as a disruptor on many occasions across the globe. One sector that has seen a sea change through the advent of technology has been broking in the financial sector.

Technology has not only brought in transparency in the sector but also helped increase the reach to clients across the country and bring down the cost considerably. This has been possible through online broking where the clients themselves punch in their buy and sell orders using internet-based platforms using their computers or mobile without calling their brokers for every execution.

Given the low rates and ease of doing business, it is not shocking that market share online brokers now account for the lion’s share of the retail broking market.

To get a deeper insight into online broking here is an Online Stock Trading Beginner’s Guide on the subject covering various aspects of the industry.

Selection of an online broker

Online brokers offer lower brokerages than offline brokers. However, not all online brokers are the same. In order to pick up an online broker, one needs to look at other factors apart from the brokerage rates.

The trading platform that the broker uses will decide the ease of entering and exiting orders and also the speed. A broker with a strong trade engine is to be preferred. A social media scan or reviews can be used to determine which broker offers a strong trading platform. A client should prefer a broker with a robust trading platform. 

These days many brokers are offering charting facilities with their broking account. A trader can not only view chart prices but also can directly trade from the charts. This feature has eased trading further. 

Offline service issues and grievance handling in case a trading terminal does not function properly also needs to be considered while selecting an online broker.

Ease of transferring money in and out of the broking account is an important feature that needs consideration. Timely payment into one’s bank account after a share should also be taken into account and can be validated by social media posts and comments plus checking on neutral finance sites.  

Finally, one should check that the broker is registered with the market regulator SEBI and is a registered member of all major stock exchanges in the country.

Account opening

Most brokers these days, especially since the increase in Covid-19 cases and lockdown have streamlined their account opening process. Account openings are done through an online process which requires submission of details and documents through the internet. This move has helped cut down account opening time and in many cases, it has been done within hours.

While opening an account one needs to be clear on which segments he is interested in or would like to trade in future. Suppose a person is only interested in trading in equities, that too in the cash segment, there is no need for him to open an account in the derivative, commodity or currency segment.

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If the person would like to start with the cash segment initially and later migrate to other segments, it is better to mark all the segments in the first instance itself.

The documents required for opening an online broking account are normally standard but may vary a bit from broker to broker. The standard documents required are PAN Card, Aadhar Card, address proof, a mobile number linked to Aadhar Card, bank statement, cancelled cheque leaf and photograph.

Demat accounts

Along with the trading account, a client also needs to open a Demat account from where his shares will be credited and debited as he or she trades.

While a client can have a Demat account with another broker or a bank it is advisable to have the trading and Demat account at the same broker to enable smooth functioning and saves everyone the time and hassle. Further, it also helps protect a client from the occasional auctioning of his shares in case he forgets transferring it or is unable to do so for various reasons.

Demat accounts are online and a client can easily access his account to see the shares that are in them.

Brokerage Plans

Online brokers offer various type of brokerage plans to meet the requirement of different type of clients. Depending on the volume or frequency of trade one can choose from the different type of brokerage plans available. 

The most common type of brokerage plans in the industry is fixed brokerages, monthly brokerage plan, and unlimited brokerage plan among others. Brokerage plans will differ from broker to broker and the client needs to compare them carefully. Many brokerages also allow a client to shift from one plan to another.
Trading Account

Brokerage rates are different in all segments of the market – cash, derivative, forex and commodities. Also, tax and other charges will differ in all of these segments and will be charged at actuals as laid down by the authorities concerned.

Brokerage Calculators

Many brokers or finance sites have a brokerage calculator which helps the client to see how much brokerage will be deducted for the transaction he does. One needs to remember that these calculators will be taking into account the tax and other mandatory charges suggested by the Ministry of Finance, market regulator SEBI and stock exchanges at the actual rates. These rates will remain constant across all brokers.

Online Stock Trading App

Most brokers that offer online trading facility also have a mobile app. The same account used for online broking can be used in this app. Both the accounts are always mapped and will show the same information.

Suppose a trade is taken on an online platform and the trader had to go away from his computer, he can square off or view the same trade using his mobile app. One needs to remember the same login should be used for both the platforms.

Margins

Margin is the amount a client has to keep with the broker based on which the limit is assigned for trading. Margins can be in the form of cash or other forms of deposits like shares or fixed deposits among others. While cash and shares are the common forms of margins many brokers allow different financial assets also as margins. One needs to check with the broker before opening an account as to which mortgages are allowed with them as margins. 

Brokers use margins as a tool to attract customers. Aggressive brokers use very high margins to attract clients. 

Online Share Trading

Online share trading means buying and selling shares in the cash market. A trader can buy and sell shares in this market segment either with the purpose of selling his shares the same day which is called intra-day trading or can carry it forward and take delivery of the same, which can be for a few days to years.

He or she will have to specify what type of trade will be taken at the time of the transaction. All intra-day orders have to be squared off by the end of the day. 

If the client does not do so, most brokers automatically square off all orders marked as intraday a few minutes before the closing bell.

This timing of compulsory square-off also varies with brokers. Some brokers also charge a fee if the transaction is compulsorily squared off.

Short-sell that is selling of shares without actually having them, is allowed only in the intraday segment.

All buy orders can be changed from intra-day to delivery provided there is enough cash in the clients account to take delivery but sell orders cannot unless the client has those shares in their Demat account. 

There are different order types which also changes with brokers. One needs to understand the different type of order the brokers offer before starting trading. There are different nomenclature for intra-day and delivery trading with brokers. Plus there are stop-loss orders and limit orders which need to be understood before taking a trade.

Online trading in Derivatives

Online trading is also allowed in futures and options segments. While the trading methodology remains more or less the same in the cash as well as derivative segments, what changes are the margin system.

In this segment too a position needs to be marked as intra-day or carry-forward while initiating a trade. Both the segments carry different margins which will again vary with the broker. A client should be clear on what margin norms the broker offers before opening the trading account.

SEBI now has strict margining norms which have helped standardised margining system across brokerages for delivery. However, brokers still have legroom where intraday is concerned.

Online Investing

Online investing is the same as online trading where all trades are marked for delivery. A client needs to be careful in selecting the delivery option when purchasing a share. Many online brokers have negligible to zero brokerages in the delivery segment.

Shares bought and sold in delivery can be tracked to the client’s Demat account.

Online Forex and Commodity Trading

Many online brokers also offer Forex and Commodity trading platforms with the same trading platform. Since shares, forex and commodities are all traded in different exchanges a client needs to make sure if the broker they have selected is a member of all the exchanges.

Forex and Commodities trading operates in the same way as derivative trading. The Margin system for trading in these segments is different as compared to derivative trading and also differs from broker to broker.

Money transfer between various segments – shares, derivatives, forex and commodities is seamless and the client need not worry about transferring money from one segment to the other before trading.

A trader can opt to trade only in forex or commodity without opening an account in shares or derivatives segment.

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