Security Analysis & Portfolio Management

Online Trading

Midhun V
M Com S4 Roll No: 3 Department of Commerce Iqbal College, Peringammala

Introduction: A Stock Exchange is a market for trading securities. Each stock exchange has certain listed securities and permitted securities which are traded on it. Members of the exchange alone are entitled to the trading privileges. Investors interested to buying or selling securities should place their orders with the members (called brokers) of the exchange. There are two ways of organizing the trading activity: floor trading system and online trading.

Floor Trading: The system of trading prevailing in stock exchanges for many years was known as floor trading. In this system, trading took place through an open outcry system on the trading floor or ring of the exchange during official trading hours. In floor trading, buyers and sellers transact business face to face using a variety of signals. Under this system, an investor desirous of buying a security gets in touch with a broker and places a buy order along with the money to buy the security. Similarly, an investor intending to sell a security gets in touch with a broker, places a sell order and hands over the share certificate to be sold. After the completion of a transaction at the trading floor between the brokers acting on

behalf of the investors, the buyer investor would receive the share certificate and the seller investor would receive the cash through their respective brokers.

Online Trading: Online trading, sometimes called electronic trading or e-trading or screen based trading is a method of trading securities (such as stocks, and bonds), foreign currency, and exchange traded derivatives electronically. It uses information technology to bring together buyers and sellers through electronic media to create a virtual market place. In the new electronic stock exchanges, which have a fully automated computerized mode of trading, floor trading is replaced with a new system of trading known as screen- based trading. In this new system, the trading ring is replaced by the computer screen and distant participants can trade with each other through the computer network. The member brokers can install trading terminals at any place in the country. A large number of participants, geographically separated from each other, can trade simultaneously at high speeds from their respective locations. The screen-based trading systems are of two types: 1. 2. Quote driven system Order driven system.

Under the quote driven system, the market-maker, who is the dealer in a particular security, inputs two-way quotes into the system, that is, his bid price (buying price) and offer price (selling price). The market participants then place their orders based on the bid- offer quotes. These are then automatically matched by the system according to certain rules. Under the order driven system, clients place their buy and sell orders with the brokers. These are then fed into the system. The buy and sell orders are automatically matched by the system according to predetermined rules.

Online trading in India: Online trading in India is the internet based investment activity that involves no direct involvement of the broker. There are many leading online trading portals in India along with the online trading platforms of the biggest stock houses like the National stock exchange and the Bombay stock exchange. The total portion of online share trading India has been found to have grown from just 3 per cent of the total turnover in 2003-04 to 19 per cent in 2009-10.

Facilities of the online trading in India: The investor has to register with an online trading portal and get into an agreement with the firm to trade in different securities following the terms and

conditions listed down on the agreement. The order processing is done in correct timings as the servers of the online trading portal are connected to the stock exchanges and designated banks all round the clock. They can also get updates on the trading and check the current status of their orders either through e-mail or through the interface. Brokerages also provide research content on their websites, such that the clients can take their own decisions on stocks before investing.

Products and services of the online trading in India: The major financial products and services of the Online trading in India are like equities, mutual funds, life insurance, general insurance, loans, share trading, commodities trading, portfolio management and financial planning.

Indian Stock Exchanges: In spite of many private stock houses at present involved in online trading in India, the NSE and BSE are among the largest exchanges. They handle huge daily trading volumes, supporting large amounts of data traffic, and possessing a countrywide network. The automated online systems used for trading by the national stock exchange and the Bombay stock exchange are the NIBIS or NSEs Internet Based Information System and NEAT for the national stock exchange and the BSE OnLine Trading system or BOLT for the Bombay stock exchange.

National Stock Exchange: NSE introduced for the first time in India, fully automated screen based trading. It uses a modern, fully computerised trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest. The NSE trading system called National Exchange for Automated Trading (NEAT) is a fully automated screen based trading system, which adopts the principle of an order driven market. Bombay Stock Exchange: To facilitate smooth transactions, BSE had replaced its open outcry system with the BSE On-line Trading (BOLT) facility in 1995. This totally automated, screen-based trading in securities was put into practice nation-wide within a record time of just 50 days. BOLT has been certified by DNV for conforming to ISO 27001:2005 security standards. The capacity of the BOLT platform stands presently enhanced to 80 lakh orders per day. Over the Counter Exchange of India: OTCEI is the first screen based nationwide stock exchange in India. OTCEIs screen based nationwide trading known as OTCEI Automated Securities Integrated System or OASIS. OASIS combines the principles of order driven and

quotes driven markets and enables trading members to access a transparent & efficient market directly through a nationwide telecommunication network.

Advantages of Online Trading: Trading stocks online has a bevy of advantages (and disadvantages). Advantages include being able to check our stock portfolio anywhere as long as we have an Internet connection, absolute control over our portfolio, access to upto-date information, competitive fee structures and the ability to access different markets. Even if we dont have access to a computer at our fingertips while we are travelling; we can always use a cell phone. Online trading can give us accurate data on how different stocks are performing so we never have to miss a bargain. Because online trading is such a massive market there is a lot of competition between brokers to get our business. Brokers are constantly out doing each other in the form of fee reductions, extra functionality and conglomerating services into a single access point. Instead of chasing data when attempting to make an informed decision we can just go to a single place to get all of the information we need. Some online brokerage services even send us messages to our cell phone that warns us of when may be a good time to buy or sell particular stocks. If we have a smart phone we make the transaction the second we receive the message.

The competition between brokers is not the only advantage of having multiple brokers available to serve us. It is also a massive source of information in itself. We can get real advice from multiple sources. Because of the inherent fluctuations in stock prices that can change within minutes having people who cast a human eye over the data to ensure that their own information is up to date can mean the difference between purchasing a stock that will never recover and purchasing a stock that may double in value over the course of a day.

Disadvantages of Online Trading: Online trading is a high risk business. However the risk is commensurate with the eventual monetary gains. Risks associated with online trading are relevant to those we can control, the economic climate and the specific business that we have invested in. If the business we have invested in suddenly announces record losses then there is a good chance our money will have halved (or worse). The current economic climate is a good indicator of how stocks fluctuate based upon the financial situation of the planet. Whilst trading online may be an easy way to buy stocks it is this simplicity that can land us in hot water. Because it is so easy to purchase stocks online; it is too easy to over commit. If we think a stock is at the right price to buy then we might get carried away and spend a lot more money than we would have otherwise. This is another

thing that is a disadvantage when trading online we dont have a support network or advisors letting us know when to buy or sell. We are alone (for the most part). It is too easy to make a poor decision which leads to an eventual loss rather than gain. If a business that we have invested in has no chance of recovering fiscally then we have no chance of making back our money. We are also at the whim of our broker. Some brokers require a minimum purchase before they will enable us to purchase stocks. They are also expensive to employ. Their pay is not based on how well the stocks are performing they get paid either way. This is why they are more than happy to allow us to make decisions for our self rather than giving us proper guidance. Some brokers even go as far as charging us for not trading enough.

References: Security Analysis & Portfolio Management Investment Analysis & Portfolio Management http://www.otcei.net/faq/ www.onlinetrading.co.in www.nse-india.com www.bseindia.com : S. Kevin : Prasanna Chandra