The Hindu Business Line : Online trading: Paperless and convenient

HAVE you wanted to buy or sell a stock urgently, but could not reach your broker? Or, has your well-meaning broker disregarded a buy/sell order because he felt it was against your best interests, and you ended up losing? Such instances can really frustrate your efforts to make money in a bullish market. There is a way out, though — online trading.

Trading via the Internet is not new, but poor connectivity and security issues have often acted as deterrents for those considering the option.

You do need to be comfortable with Internet transactions if you want to trade online. You will have to live with the possibility of a security breach. But you can minimise this risk by not placing orders online at an Internet café or even at office, for that matter. As for poor connectivity, the growing use of broadband could substantially improve the experience of trading online.

Why trade online?

Several broking houses now offer online trading facilities. You can trade online with e-brokerages such as ICICIDirect, kotakstreet, IndiaBulls, India Infoline's 5paisa.com and HDFC Securities.

If you are already comfortable trading with your regular broker, here are a few reasons why you may consider switching to trading online, or at least as another avenue of trading.

An obvious advantage of online trading is that your transactions would be virtually paperless. Your trading account would be linked to your demat and bank accounts, ensuring a smooth transaction process. This is especially helpful in the extant T+2 settlement system, where you have just two days to settle your transaction.

The normal process of issuing a delivery note, in the case of a sale, or arranging for payment in the case of a purchase of shares, is all taken care of the minute your order is executed online.

The absence of manual intervention ensures that you are completely in control of all transactions.

There is also little room for error, as your order is always confirmed before it is executed. You can also make better decisions as you have a clear record of all your previous transactions. When you trade offline, a demat statement is normally sent to you only on a quarterly basis. Keeping track of your portfolio can be a hassle in such a case.

Convenience is probably the greatest advantage online trading offers an investor. If you do not have time to trade during market hours, when perhaps you are at work, you can log on to the web-trading site and place your orders offline, during off-market hours.

Your order would join the queue and be executed the next day. You would need to enjoy a good relationship with your broker, for you to be able to reach him in the late hours.

For Non-Resident Indians (NRI), trading online is perhaps their easiest option to invest in the Indian stock markets.

What is more, the time difference, in some cases, can work to their advantage. Antony, an NRI-based in New York, places his orders in the evenings after work, when it is day time in India and the markets are open.

You also have access to considerable information online. Log onto ICICIDirect, for instance, and you get the latest news, market information and company research. Do not, however, go by tips that you read online and off message boards. Invest in a company only if you have a fair understanding of its business and are convinced of its growth prospects.

If you are still deterred by the connection problems that you might have while placing an order, do not be.

If your connection is maddeningly slow and you want to get your order executed immediately, most e-brokerages also provide a facility to trade offline by placing your order via the phone.

What's on offer

If you do decide to trade online, you have a number of portals to choose from, as many brokers now provide this facility. But the features offered by the various brokerages vary, not to mention the brokerage fee.

Some tend to be more restrictive than others in terms of exposure limits on margins, short selling, squaring off positions and so on. Given these differences, it would be best to look up several sites and then choose the trading portal that is suits your needs best.

Most e-brokers have tailor-made products for different kinds of investors.

For instance, kotakstreet offers the Kotak gateway for those investors whose initial margin is less than Rs 5 lakh. If you achieve a higher volume of trading any month, you get upgraded to a superior product, where you get benefits of higher exposure on your margin, research reports and lower brokerage fee. There are also options for traders who are just interested in squaring off their positions within the day.

For instance, with Kotak High Trader, you can do only intra-day trading and your positions are automatically squared off at 2-55 p.m. ICICIDirect offers Margin Trading and Margin Plus products where all transactions are squared off within a settlement cycle, unless converted for delivery.

Special features

Trading online, however, does come with its set of restrictions and you need to be aware of these before settling for a product. For instance, in most cases, you cannot sell a stock unless you have the corresponding shares in your demat account.

In other words, you cannot short sell. ICICIDirect, however, allows you to short sell if you trade in the margin segment, provided you close out your position before the settlement period. If you trade in the cash segment, then you still have the option of selling shares that are not in your demat account, provided the shares have been bought but not delivered to your account. That is, you get to "Buy now, sell tomorrow". HDFC Securities and kotakstreet offer this facility as well. Also, as all your accounts are integrated, your funds automatically get blocked when you place an order. This means that 100 per cent of your funds representing any transaction would get blocked, unless you are trading on margin. Some e-brokers require you to carve out a portion of your savings account for trading. This can be altered according to your needs, so you would be able to make better use of funds in your savings account.

Most sites have an FAQs link, which covers an exhaustive list of what you can and cannot do across various products. Demos are available online to guide you through the process.

What are the costs involved?

To open a trading account with ICICIDirect or HDFC Securities, you will need to have a bank account with ICICI Bank and HDFC Bank. If you already have an account with them, then you would only have to pay for opening a trading account with the banks for about Rs 750. In addition, you would be charged maintenance fee for your demat account annually. Other portals have tie-ups with specific banks, which would give you a little more freedom in choosing the bank account that is convenient to you. Opening an additional account merely for trading may be tiresome, but it might be advantageous to have a separate account for trading to avoid any confusion.

Brokerage fee varies depending on the volume of trading and whether the trade is delivery-based or not. It is as high as 0.85 per cent with ICICIDirect, but this includes service tax. HDFC Securities insists on a minimum transaction value of Rs 1,000. It also charges the higher of Rs 25 or 0.5 per cent, for delivery-based trades.

The brokerage may be more expensive than your regular broker, but considering the advantages, it might be worth it. If you were a short-term investor, however, the steep brokerage could hurt your profits. You would also have to invariably bear the cost of Internet time. But this may be a small price to pay in a bull market, where there is money to be made.

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