The exchange of goods and services between entities is known as trading. It is the edifice on which societies are built, providing for economic growth and advancement. Now, a trade occurs in specified places known as markets. There are different types of markets, contingent upon the trading products. In the present era, the organized place, subject to government rules and regulations, selling stocks and securities are known as stock markets. With the advent of the internet, the physical buying and selling of shares are simulated online and is known as the online share trading system.
History of the online share trading system
The two major stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange. Formed in 1875, the BSE is the oldest stock exchange in Asia. Post-independence, it was the first stock exchange to be recognized by the Securities Contract Regulation Act, 1956. To regulate the stock markets, the Securities Exchange Board of India was made a statutory body in 1992. Trading commenced in the second stock exchange, the NSE in 1994. The arrival of the NSE was a game-changer as it introduced, for the first time in India, the concept of electronic transactions. Subsequently, the BSE also introduced online trading in 1995. The next year, the Demat Account system was introduced for trading in the NSE. This provided for the holding of shares and securities in the electronic format, thus absolving the requirement of cumbersome paperwork in share trading.
In consonance to conduct online share trading through dematerialized accounts, the National Securities Depository Ltd (NSDL) was formed in 1996. It was promoted by the NSE. In 1999, the Central Depository Service (India) Ltd (CDSL) was formed, with the BSE as its major promoter. Now investors and traders had to compulsorily engage in share trading online via the Depository Participants (DPs) who were registered agents of the depositories. The DPs included stockbroking firms, banks, financial institutions, and so on offering depository services for conducting online trade.
The functioning of the online share trading system
If you want to trade in stocks, the foremost requirement is opening a Demat Account with a DP. You must, however, remember that while the Demat account keeps your shares in the electronic format, it doesn’t allow online trading. For an online trade, you are next required to open a trading account. You can make purchase and sale orders via the trading account. Both your Demat account and trading account are linked with your bank account. Let us understand this with the help of an example. Suppose A wants to purchase the shares of XYZ company. He will make a purchase order via his trading account. The shares will be reflected after the settlement of the transaction in his Demat account, while the cost of purchase will be debited from his bank account.
Sequence of events in the online share trading system:
Once you make a purchase a sell order via your trading account, the following events occur :
Online order matching by stock exchange:
In response to your purchase or sell order, the concerned stock exchange finds a suitable counterparty. The stock exchange matches the order of the priority of price, time, and quantity.
Settlement of transactions:
Once an online trade order is executed, the settlement cycle followed in India is: Transaction (T)+2 days. This means that the sell or purchase order will be reflected in your Demat Account after two working days.
Other online investment options in stock markets
Apart from buying and selling shares, you can choose to invest online in :
These are formal contracts governing the right to purchase shares at the predetermined price on a pre-specified date.
These are formal agreements to purchase or sell shares on a future date.
Equity Mutual Funds:
Asset Management Companies combine the money of several investors and the funds are invested across stocks of various companies.
These are formal contracts whose value is determined based on an underlying asset. The different derivative instruments include stocks, currency, bonds, commodities, etc.
These are essentially loans given to companies, which are repaid on a specified date with interest.
Benefits of share Trading Online
As compared to physical trading of shares, online trade has several advantages. These include :
- Streamlined share trading process: Share trading online results in a better and more organized trading process.
- Zero paperwork required: As compared to the cumbersome paper trail involved in physical trading of shares, share trading online involves the trading of shares kept in the electronic format.
- Elimination of risks: While physical shares face getting lost or damaged, dematerialized shares are safe and secure. The online trade is conducted through cutting-edge digital technology, and the transactions are digitally secure.
- Online trade at blazing fast speed: As the entire transaction is processed digitally, the online trade is completed within minutes.
- Instant communication: With digitalization, you receive instant notification about the completion of the online trade.
- Greater transparency: While eliminating the risk of fraud, share trading online digitally records each trade, thus providing for greater transparency.
Reasons for price fluctuations of shares
Supply and demand factors are responsible for the price fluctuations of shares. A weak demand can be caused by a plethora of variables, like a weak economy, negative market sentiments, political instability, issues with the company’s performance, overpriced stocks, and so on. A scenario where the prices of stocks fall is called a bear market. Conversely, a good demand can result in stock prices to rise. It can be caused by positive macroeconomic variables, positive market sentiment, strong company fundamentals, and so on. This is called a bull market.
Benefits of investing in stock markets
Such investments can help an investor to:
- Diversify portfolio by investing in various stocks and securities.
- Gain returns via value appreciation of shares.
- Earn benefits of corporate actions, like issuance of dividends.
- Allows investors to be part-owners of the company by possessing its stocks.
Can I have more than one Demat Account?
Yes, you can have more than one demat or a trading account with the same broker or any other broker. Some investors hold various accounts to segregate their holdings according to their various financial goals.
Can I do share trading online after the market has closed?
Yes, you can trade even after the market closes, by placing an After Market Order (AMO) with your stockbroker. Remember, the stock markets open at 9.15 am and close at 3.30 pm. If you are unable to trade online during the designated hours, you can log into your trading account and select the AMO option.
After understanding the features and benefits of the online share trading system, you can begin your investment and trading journey. Do remember to choose a reputed and trusted stockbroking firm. Angel Broking is among the few DPs to be registered both with NSDL and CDSL, and provides multiple benefits, like flexible brokerage fees, single-point access to all markets, in-depth quality research, cutting-edge trading platforms, and personalized customer support.