What is Online Share Trading?
Online share trading is one of the oldest business activities of all times. It works very similar to any other trading business which involves buying and selling, except that, in case of online share trading, instead of goods or products, one is actually buying and selling shares or stocks of companies.
How Does Online Share Trading Work?
The 12 critical steps for successful online share trading are:
- Step 1: Open an online share trading and Demat account
The first prerequisite for online share trading in India is having an online trading and Demat account. In case, you don’t have one, you’ll need to open a trading and Demat account. With Samco, India’s best equity stockbroker, you can open the best trading and Demat account in India in less than 5 minutes without any paperwork.
- Step 2: Research, discover and decide to buy/sell a share
Generating a trading idea is by far the most important step in the entire trading process. Traders should be able to identify opportunities for online share trading using a variety of strategies, tools and processes. Once a trading idea is generated, then the next step is the execution of the trade itself. In case you do not have lucrative trading ideas, you can check out the StockNote App for a variety of unique trading ideas.
- Step 3: Transfer funds to your trading account
As per stock exchange regulations, the money required for placing a trade should be available upfront. In online share trading, traders are required to transfer funds to their trading account before actually initiating a trade. Check out the step by step process of transferring funds to your trading account.
- Step 4: Place an initial order
The next step in online share trading is to place the order based on the trading idea generated by you. This can be placed by logging on the online trading platform and simply placing an order. Check out the detailed steps on how to place an order on the StockNote App.
- Step 5: Order matching by the exchanges
In online share trading, once you place an order, the order gets executed into an actual trade on the stock exchanges once a suitable counterparty is found. For each buyer, there needs to be a seller and vice versa. Exchanges match orders based on price, time, quantity priority i.e. first prices are matched, then the time is assigned priority for matching (based on time of order) and finally quantities are matched.
- Step 6: Settlement of transaction
Online share trading has drastically reduced the settlement cycle. Once an order is executed into a trade, the settlement of trades happens depending on the settlement cycle of the instrument. Stocks get settled on T+2, whereas derivatives transactions are settled the same day. Samco is one of the only brokers in India that allows customers to pay for stock purchases on T+2 instead of paying on T Day. Once you buy stocks on T day, they are credited to your Demat account on T+2 day and are essentially “Open Inventory/stock”.
- Step 7: The post trade movement in price of share
This is the holding period of a trade. Once you buy a stock, you’d like it to move upwards over time and vice versa if you are a seller. There are different types of traders with different holding periods. We’ve discussed this in detail in the sections after this.
- Step 8: Decision to exit a trade
This refers to the process of exiting an open trade. The exit decision decides the realization of your profits/losses for each trade. There are various factors that could drive the exit trade – meeting price targets, exiting via a stop loss, exiting for better opportunities or simply exiting because the trade did not play out as visualized.
- Step 9: Placing the exit order
The next step in online share trading is placing an exit order. The steps for placing an exit order are similar to that of placing an initial order.
- Step 10: Order matching by the exchanges
Similar to the initiation leg, the exit leg order gets matched by the Stock Exchanges and gets converted to a trade.
- Step 11: Settlement of transaction
Similar to the initiation leg, the settlement of transactions happens on T+2 days. In case you have sold your stocks, your stocks shall be debited from your Demat account linked to your trading account and the funds shall be credited to your trading account.
- Step 12: Bank account credited with capital and realized profits/losses
Once your trading account is credited, you can place a request to withdraw funds from your trading account. This shall include your initial capital as well as your realized profits/losses.
Chronological sequence of events highlighting how to make money through online share trading:
1 Open a Online Trading and Demat account
8DECIDE TO SELL COMPANY X at Rs. 150/share on Wednesday
- You decide that you would like to exit Company X which could be for a variety of reasons.
9PLACE AN ORDER TO SELL SHARES OF COMPANY X
- Place a sell order on the trading platform say on Wednesday at Rs. 150/Share
2DECIDE TO BUY COMPANY X at Rs. 100/share on Monday
- Let's say you are excited about prospects of Company X and expect it's value to go up over time.
7PRICE AND VALUE OF COMPANY X go up over time
- Your opinion of Company X was right and let's say the price of Company X appreciates to Rs. 150/share.
10ORDER MATCHED BY EXCHANGE
- The Stock Exchange will match the order and find a suitable Buyer for shares of Company X
3FUND YOUR TRADING ACCOUNT
- Transfer funds to your online trading account on Monday
6PURCHASE SETTLEMENT OF TRADE
- On T+2 i.e. in this case on Wednesday, the buyer will receive the shares of Company X and the seller will receive funds on account of sale. This settlement process is carried out by Exchanges, Clearing corporations and brokers.
11SELL SETTLEMENT OF TRADE
- The shares shall be debited from your Demat account and proceeds of sale shall be received in your trading account on T+2 day. In this case Rs. 150 less applicable expenses shall be credited to your trading account.
4PLACE AN ORDER TO BUY SHARES OF COMPANY X
- You can use an online trading platform to buy shares at Rs. 100/share on Monday once your account is funded.
5 ORDER MATCHED BY EXCHANGE
- The Stock Exchanges NSE/BSE on which the order is placed match your Buy order with a suitable sell order.
12 CREDIT OF YOUR REALISED PROFITS TO YOUR BANK ACCOUNT
- You can request a pay-out of your funds to your bank account and in this case you shall receive Rs. 150 in your bank account. This comprises of your initial Rs. 100 capital and Rs. 50 of realised profits.
The above example was an illustration of the chronology of events detailing how you could make money in online share trading by buying shares, holding them for some period of time and then selling those shares at a profit. However, there are multiple approaches to making money in online share trading.
You could trade across different time periods - a few seconds, a few minutes, a few hours, a few days, few months or few years. Traders with different time horizons have different strategies and are popularly referred to by different names. This is an illustrative but not exhaustive list.
As you can see, the 2 primary objectives of trading are either to create an income by active trading or to create wealth over a period of time by passively investing.
How to be Successful in Online Share Trading?
In order to be successful in online share trading, the first and most important thing is having a set of rules.
As a trader or investor, while we may initiate trades to make a profit, no one knows how the market will actually unfold and play out. Therefore, it is extremely important to have and follow a set of rules for a successful online share trading experience.
In this section, we will try and lay out a template of the kind of rules that traders must have to be successful in online share trading. These rules will not only help traders become successful in online share trading but will also help them navigate the markets in case anything goes wrong.
- Rule #1: Build a trading strategy
In online share trading, It is important to identify a trading strategy and then practice the implementation of that strategy day in and day out. You could choose from a variety of strategies – breakouts, breakdowns, large candle moves. What is important is that you select a strategy that suits your psychology.
- Rule #2 : Identify entry points of trades identified with the trading strategy
Once you decide on a strategy, it’s important to identify the entry levels and exit levels of each stock. In online share trading, one must be very careful not to chase stocks. Don’t go out and buy a stock just because it is moving away from your identified price. Be patient and only enter a stock/trade once your ideal entry level is reached.
- Rule #3 : Identify a strict stop loss for each trade
One of the most important rules in online share trading is having a STOP LOSS. There is an old saying “Cut your losses and let your winners run” which means that a trader should be quick to cut their losses in case the trade goes against the direction that they were hoping for. You can deploy either a static stop loss or a dynamic trailing stop loss.
- Rule #4 : Identify an exit strategy for your trades
Along with an entry and stop loss rule, another important rule for successful online share trading is to have an exit strategy in place. There could be a variety of ways in which you could identify an exit price for your trade. It could be based on a certain pattern identified at the time of a trade, or by way of a trailing stop loss (helps in case of breakouts and trending moves), or could be a fixed percentage (%) - 20%-30%-50% gain. Your exit strategy is key to determining your profitability in online share trading.
- Rule #5 : Risk management by sizing your position correctly
In online share trading it is critical to decide the correct quantity for your trade. This is because if you go overboard on a particular trade, it could completely wipe out your trading capital. If you are simply trading stocks, you mustn’t invest more than 15% of your capital in a single stock. If you are actively trading, you mustn’t risk more than 2% of your trading capital in a single trade.
- Rule #6 : Don’t blindly follow advice without understanding the rationale or doing some homework yourself
Every time you initiate a trade, make sure you are aware of the underlying rationale for that trade. Do not simply enter a trade based on hearsay or just because you saw an expert advising an idea on TV without digging deeper. Understand the ‘why’ of each trade before you start online share trading.
- Rule #7 : Write and document your trades in a trading journal
Create a trading journal and record your trades. Keep reviewing your trades from time to time and check the trades initiated against your trading plan. Modify your trading strategies and plan based on your findings.
- Rule #8 : Be Patient and disciplined
A trader will not make money every day. There will be some profitable days and months and some days and months when a trader will lose money. It is important to understand that losing is a part of online share trading and a trader should not let short-term losses affect them.
It is important to follow your trading plan perfectly and avoid constant churning based on a few months of underperformance. It’s important to be patient and disciplined. If one is patient and disciplined in stock trading, then the chances of being hugely successful are very high. What is important is that you let your profits run and make profits month after month and not lose too much money by holding onto losers. This will make sure that you stay in the game and make money over the long run.
Samco Securities offers India’s best online share trading experience!
Check out our free video on the 10 golden rules for trading and investing in the stock market for beginners.