Almost all of equity and derivatives trading today takes place in online marketplaces. This was not always the case. The advent of online trading has resulted in a democratised participation in the stock market in India. This article is divided into 6 major sections highlighted below and explores the rise of online trading.
|What is stock market and stock exchange?
This section explains the difference between stock market and stock exchange.e
|Before the digitization
The sections answers how trading was done before the process of digitization happened
|Advent of online trading
Role of NSE in the advent of online trading is explored in this section
|Participating in the online stock market
The basic requirements to become an online stock trader are listed here whie also explaining what is online trading
This section discusses the various security measures put in place by SEBI and the exchanges to ensure integrity of the marketplace
A comparison of bank, full-service and discount brokers is provided here
What is stock market and stock exchange?
Let us start with the most obvious question: what is a stock market? A stock market is the market in which the trading of a company’s stock including both listed and unlisted securities takes place. It follows that the Indian stock market encompases all the stock exchanges across the nation and all transactions that take place off-exchange as well. The follow-up question is: what is a stock exchange the? A stock exchange is an organized marketplace where the members meet regularly to trade company stock or other listed securities. The members could either be agents acting on behalf of their clients or be principals representing their own interests. Most of the trading happens in secondary market – traders buy and sell shares they own and proprietors of the company involved do not make any money off these trades.
Before the digitization
Indian stock market is one of the oldest and the most robust markets in Asia. Bombay Stock Exchange (BSE) is Asia’s first stock exchange. Before the dematerialization of shares and the advent of online trading, traders had to be physically present at the exchanges where the security they were interested in was listed. This meant principas who lived far away from such an exchange had a difficult time participating in the market. An investor who wanted to trade a security not listed on the nearest exchange had to route orders through a series of correspondent brokers to the appropriate exchange. This resulted in increased uncertainty and high transaction costs. The other result of such disparity in access was that a handful of brokers were able to corner the market.
Further, the information imbalance and conflict of interest resulted in blatant market manipulation. It all came to head in 1992, when it came to light that a BSE member, Harshad Mehta, was pulling off a security scam by manipulating the market. This resulted in calls for reforms from all market stakeholders. BSE was slow to respond to these calls and the government of India pushed the creation of a rival stock exchange called the National Stock Exchange (NSE).
Advent of online trading
NSE was established with an express purpose to provide equal access to investors across the nation and make participating in stock market easier. Given the increasing penetration of the Internet in the nation, it was felt that a switch to electronic trading and establishing an online share market is the way forward. NSE played an instrumental role in establishing National Securities Depository Limited (NSDL), the first depository in India, making it possible for investors to hold and trade securities in a digital form. This not only made investing simple, but also made the price discovery more transparent. The price information was no more a secret available only to a handful of traders present at the exchange, but was widely broadcasted and available to everyone regardless of their location.
NSE, with able support from the government of India, ensured that:
- a nation-wide trading facility for equities, debt and other hybrid instruments was established
- equal access to investors across the nation was available through the Internet
- a fair, efficient and transparent securities market was provided to investors using electronic trading systems
- shorter settlement cycles and book entry settlements systems, and
- the current international standards of securities markets were met
Participating in online stock market
individual investors cannot interact directly with the stock exchanges for executing trades, as this would put their systems under an immense pressure and increase the workload significantly. Instead, all investors and traders are required to open an account with a broker registered with them. The broker would provide the trader/ individual investor with login credentials that would allow them to buy and sell on the stock exchange. These transactions may attract brokerage and tax liabilities payable to the broker and the government respectively.
The accounts to be opened are trading & demat accounts. A trading account is like a bank account that is used solely to pay for and receive payments from stock trades. This would interact with the traders banking account (either saving or current) from where the trading funds will be transferred back and forth. This account provides one access to a trading platform or terminal to place trade orders as desired.
A demat account is like a digital locker where the shares are held in a dematerialized format – that is instead of physical share certificates, a digital equivalent is stored in the demat account.
When one places an order to buy a share, the money from the trading account is used to pay for the same. An investor could either manually transfer the funds from bank account to the trading account or permit an auto-debit based on trading demands. It is always better to manually transfer the funds to ensure that the overall investment portfolio is well-balanced between share market investments and investments in other instruments. Once the purchase is executed, the shares acquired are stored in the connected demat account.
Similarly, when a sell order is placed, the trading account would access the demat account to verify the availability of securities for the sale. Once the sale is executed, the funds are credited to the trading account. One should periodically transfer any unused funds to a banking account as they would typically earn a higher interest there.
SEBI and exchanges have put in place various regulatory and surveillance actions to ensure that the integrity of the online marketplace is not compromised. Further, it ensures that the interests of the investors are protected against any underhanded price manipulation. These actions include:
- Rumour verification and clarification in case of unexplained spurt in either price or volume, that is if there is a sudden increase in either traded volumes or the security price of a share without any announcement from the company, clarification is sought and then disseminated to the market. Similarly verification of reports in the media that have an impact on volumes/ price is carried out by the exchange.
- Periodic review of price bands in which a securities price can move. While daily reviews are carried out for any downward revision of the price bands, a bi-monthly process is set up for upward revision based on criteria defined by SEBI.
- Periodic review of movement of securities to and from trade for trade segment
- Periodic call auction session for illiquid securities to ensure that investors do not suffer when a security becomes less popular on the exchange.
- Graded surveillance measure to preemptively alert and advise investors to be extra cautious while dealing in certain securities.
Further, risk management system has been put in place by exchange under the guidance of SEBI to ensure risk containment.These measures include capital adequacy requirements imposed on members, monitoring of member performance and track record, stringent margin requirements that are to be met by providing liquid assets to cover any shortfall, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached.
A trader/ investor can open trading and demat accounts with any registered stock broker. All one needs are the following documents:
- Pan card,
- Address proof – any among Aadhar Card, Passport, Driving License, Voter ID, any utility bill or the latest bank statement ,
- Income proof – any among a copy of income tax return, form 16, salary slip from an employer or 6 months bank statement.
- Bank account – a canceled cheque leaf or a copy of the first page of bank passbook to verify the bank account details.
One should visit the website of the chosen broker to start the application process for opening the accounts with them. A verification process needs to be completed before the accounts are opened – for this the broker may either send their agent to collect the document copies or ask to courier the same to their address.
Bank Brokers: Banks like SBI, HDFC, ICICI, Kotak Mahindra, Axis etc. provide a 3-in-1 account. That is saving, trading and demat account rolled into a single service offering – this takes away the burden of manually transferring amount between banking and trading account. Since the bank itself is acting as the broker, no withdrawal request needs to be placed with the broker as funds are automatically transferred to banking account increasing the liquidity for the trader.
Traditional brokers: Traditional or full-service brokers include institutes like Sharekhan, Angel Broking etc. In addition to an access to a trading terminal, these also provide tips or recommendation based on their research. Typically, the brokerage charges levied by such brokers are on the higher side. These can vary from 5p to 10p per share for intraday (buying & selling same day) and 10p-50p per share for delivery.
Discount brokers: An investor could also open trading and demat account with discount brokers. These brokers provide an access to trading terminal just like bank and traditional brokers, but do not share any recommendations. This means that a trader/ investor has to depend on their own research for deciding which companies to invest in. This allows the brokers to charge a much lower brokerage on each order. Unlike the traditional brokers, discount brokers charge a flat fee per order. These could vary from Rs. 5 to Rs. 40 per order. While some like Zerodha may charge no brokerage fee on equity delivery, and charge a flat fee per executed order for intraday and F&O trades. This will result in considerable brokerage savings for most traders and investors.
In conclusion, the advent of online trading has provided equal opportunity to all traders and investors to participate in the Indian stock market regardless of where they are located or how much they want to invest. Discount brokers have further lowered any barriers to entry by charging a much lower brokerage than the traditional brokers.
For more useful articles on trading, investing and market knowledge, visit our Knowledge Center section.
(Note: The above list is for information purpose only. Avoid trading and investing based on the information given above. Before investing in stocks do due diligence).