Name: Arnab Gangopadhyay Enrollment Number: 09BS0002872
Subject: Assignment on Security Analysis
Topic
A comparative analysis between online and offline trading in the capital market
Introduction: “Change is the law of nature”. There were times when man was a wanderer or
a nomad. He himself had to go place to place in search of food, water and now everything is
available at our doorstep just at the click of the mouse. The growth of information technology
has affected almost all sectors of life. Internet has enabled us to get every information at our
doorstep. When Internet has affected all sectors how could “stock markets” the most important
player of the economy, has remained far behind? Like all other sectors Internet has set its feet in
the stock markets also.
The introduction of the Internet has surprisingly changed our way of life as a society. It has
defined the way we do business and the way we correspond. The financial industry revolves
around the Internet. Every thing is just a few clicks away. The Internet has opened many
opportunities for online trading. Internet has introduced a way for consumers to manage their
money online. Not to mention, Internet has transformed the way investment companies operate
their business and has made it easy for private investors to gain straight access to a range of
different markets and online tools that were at one point only reserved by the use of investment
professionals. Consumer investing and online trading has dramatically changed over the last
decade. Online trading dynamically continues to be redefined. Services have expanded to include
integrated management of additional financial accounts. Not to mention, it has subsequently
expanded in conjunction with ground-breaking improvements to the traditional trading interface,
such as telephone interface systems.
Concept:
DEMATERIALISATION OF SHARES
Dematerialization is the process wherein shares certificates or other securities held in physical
form are converted into electronic form and credited to demat account of an investor opened with
a depository participant. SEBI has made compulsory trading of shares of all the companies listed
in stock exchanges in demat form with effect from 2 nd January 2002.The procedure of opening a
demat account with DP is similar to opening an account with a bank.
ELECTRONIC SETTLEMENT OF TRADE
A. Procedure for purchasing dematerialized securities
The procedure for purchasing dematerialized securities is also similar to the procedure for
buying physical securities.
1. Investor instructs DP to receive credits into his account in the prescribed form. There may be
one time standing instruction or separate instruction each time to receive credits.
2. Investor purchases securities in any of the stock exchanges linked to depository through a
broker.
3. Broker receives payment from investor and arranges payment to clearing corporation.
4. Broker receives credit to securities in clearing account on the payout day.
5. Broker gives instructions to DP to debit clearing account and credit client’s account. Investor
receives shares into his account by way of book entry.
B. Procedure of selling dematerialized securities
The procedure for selling dematerialized securities in stock exchanges is similar as selling physical
securities. The only major difference is that instead of delivering physical securities to the broker, the
investor instructs his DP to debit his demat account with the number of securities sold by him and credit
the brokers clearing account. The procedure for selling dematerialized securities is given below:
1. Investor sells securities in any of the stock exchange linked to depository through a
broker.
2. Investor instructs his DP to debit his demat account with the number of securities sold
and credit the broker’s clearing account.
3. Before the pay-in-day, broker of the investor transfers the securities to clearing
corporation.
4. The broker receives payment from the stock exchange.
5. The investor receives payment from the broker for sale of securities in the same manner
as received in case of sale of physical securities.
REMATERILISATION OF SHARES
Rematerialization is the process of conversion of electronic holdings of securities into
physical certificate form. For rematerilisation of scrips, the investor has to fill up a remat request
form (RRF) and submit it to the DP. The DP forwards the request to depository after verifying
the investor’s balances. Depository in turn initiates the registrars and transfer agent or the issuer
company. RTA/ Company print the certificates and dispatch the same to the investor.
Advent of online trading
The history of e-trading goes back to 1983, when a doctor in Michigan placed the first online trade using
E*TRADE technology. What began with a single click over 16 years ago has now taken the world by
storm. The concept was visualized by one bill porter, a physicist and inventor with more than dozen of
patents to his credit, who provided online quotes and trading services to fidelity, Charles Schwab, and
quick and Reilly. This led bill to wonder why, as an individual investor, he had to pay a broker hundreds
of dollars for stock transactions. With incredible foresight, he saw the solution at hand, some day
everyone would own computers and invest through them with unprecedented efficiency and control.
And today his dream has become a reality.
PROCESS OF ONLINE TRADING
An investor interesting in trading through Internet shall have to; firstly register himself with an Internet
brokerage firm. Some formalities such as filling the account opening form of the e-broker, copies of
identity proof, copy of residence proof are made to register him with the e-trader. Secondly, the
investor would be required to open a bank account with a scheduled bank and sufficient balance should
be kept in the account. Thirdly he would be required to open account with a depository participant
because only dematerialized shares can be traded on Internet.
The client places order via the net by logging on to his
Broker’s site.
The broker accepts and executes the order and places it with
the exchange
The exchange accepts the order after checking the share limit for the day.
The broker makes the payment either directly via the client bank account
or pays through its own account and recovers it later from the client.
The exchange receives money and completes the settlement.
The client is intimated about the settlement either through
the demat or via e-mail.
So, generally following steps are followed while doing the trading through the Internet:
Step-I:
Those investors interested in doing the trading over Internet system, that is, NEAT - ISX (NSE), should
approach the brokers and register with the Stock Broker.
Step-2:
After registration, the broker will provide to them a login name, password and a personal identification
number (PIN).
Step-3:
Actual placement of an order, using the place order window as under can then place an order:
(a) First by entering the symbol and series of stock and other parameters such as quantity and price of
the scrip on the place order window.
(b) Second, fill in the symbol, series and the default quantity.
Step-4:
It is the process of review. Thus, the investor has to review the order placed by clicking the review
option. He may also re-set to clear the values.
Step-5:
After the review has been satisfactory; the order has to be sent by clicking on the send option.
Step-6:
The investor will receive an "Order Confirmation" 'message along with the order number and the value
of the order.
Step- 7:
In case the order is rejected by the Broker or the Stock Exchange for certain reasons such as invalid price
limit, an appropriate message will appear at the bottom of the screen. At present, a time lag of about
ten seconds is there in executing the trade.
Step-8:
It is regarding charging payment, for which there are different modes. Some brokers will take
some advance payment from the, investors and will fix their trading limits. When the trade is
executed, the broker will ask the investor for transfer of funds by the investor to his account.
Analysis:
FEATURES OF ONLINE TRADING:
The Online Trading is having many features which make it most suitable for the investors to go
for. Some of these features are as follows:
The Internet can provide a new sense of control over your financial future. The amount of
investment information available online is truly astounding. It's one of the best aspects of being
a wired investor. For the first time in history, any individual with an Internet connection can:
Know the price of any stock at any time
Review the price history of any stock in chart format
Follow market events in-depth
Receive a wealth of free commentary and analysis about stock markets and
the global economy
Conduct extensive financial research on any company
One of the great appeals of using an online trading account is the fact that the account belongs
to you, and is under your direct control. When you want to buy or sell stock, you no longer
need to call your broker on the phone; hope that he is in the office to place your order; possibly
argue with the broker about the order; and hope that the transaction is executed instantly.
At the most basic level, an online trading account gives you more agility in buying and selling
stocks. This is through sophisticated information streams, dedicated trading platforms and
sophisticated tools for accessing the markets.
Every broker house aims at providing the investor with the best price available. Also due to the
high level of transparency with regard to display of information relating to the specific stocks
and company profiles, you will be able to get the best quote for your orders.
Online trading offers you greater transparency by providing you with an audit trail. This involves
a complete integrated electronic chain starting from order placement, to clearing and
settlement and finally ending with a credit into your depository account. All these stages are
subject to inspection, thus bringing in transparency into the system.
Online trading integrates your bank account, your trading account and your demat accounts,
which leads to easy and paperless trading for you.
You as an Investment online customer will be able to execute the entire trading transaction,
right from logging on to our site, to the execution and settlement of your bank account, in a
very short period of time.
Trading on the net, gives even the smallest retail investor access to information that earlier was
available only to the big traders. This provides a level playing field for all investors in the
securities market.
This method of trading reduces the settlement risk for the investor, as in this case all short sell
orders are squared off at the specified cut-off time and not allowed to be carried forward.
In the case of a demat account your demat account is checked by us before executing your sell
transaction. This reduces the settlement risk for the buyer, who is assured of the delivery of the
securities and for you as a seller of the securities
PROBLEMS OF ONLINE BROKING
The main problems of online trading are as follows:
1.) "Server not found":
This may appear on one’s screens when he is desperately trying to get out of an unprofitable
position. Some of the online sites are providing a telephone number for use in case their sites
are overloaded or their server down.
2.) Connectivity of the Broker with NSE: Recently ICICI Direct had a connectivity problem with
the NSE for two and half-hours during trading hours. This problem is rare but be alive to its
possibility.
3.) Cyber attack:
In the event of a malicious attack on the systems of one’s broker he is protected only if the
company is taking proper precautions against such attacks and if proper backup is regularly
been taken. He may like to choose a brokerage that has a stated security policy and
contingency plan in place.
4.) Non-availability of a seamless interface:
As a client one will access the NSE through a server of the online brokerage and this may
involve queuing delays. If a number of client access the server the server takes its own time
sending the orders to the NSE server. He must check out the seamlessness of this interface
before selecting an online brokerage. The faster the orders are processed the more seamless is
the interface.
5.) Margin:
If Internet trading alone is not fast and furious enough; many people are trading on margin.
That is where the brokerage firm lends you money by leveraging his account, allowing him to
buy a large amount of securities by putting up only a small amount of money. He may have
forgotten what he read in the small print of his agreement, but the brokerage firm has the right
to change the maintenance margin requirements without any warning or notice to him. In fact,
the firm has the right to liquidate his securities holdings (and it can pick and choose which ones)
without any notice to one if he fail to meet the margin call. And there he was leveraged to the
hilt, hoping to hit a home run when he discovered that he is required to make a large deposit
that he cannot make. The next thing one know, the firm is selling off his securities at a point in
time that is not the best for him. These are the perils of trading on margin.
6.) Little use of advisory services:
The advisory services being promised by the brokers would be of little use to investors looking
for an insight into the market. Many would not like to rely on research reports, which are there
for all. So, net investors will have to do their own research and take their own decision,
whether wild or wise.
7.) Increased charges:
Some of the brokers are of the view that they would have to provide advisory services to the
customers. But with increased volumes, they will have to follow the international practice of
charging a little more than the normal charges from a customer looking for personal advice.
Conclusion: Although the process of online trading is becoming popular to the investors these
days still the proportion is not that huge amount. This is because there are many investors who
invest in the capital market without much knowledge of the stocks to invest which can give
them better returns subject to minimization of risk as possible. So these investors require
professional guide to select proper stocks depending upon the market conditions. The brokers
and professionals can help in the process of choosing the right stock. But considering online
trading it is more suitable for investors who have necessary knowledge required to invest and
select stocks as the advisory service is not very much in online trading. Although these days
many financial organizations boost online trading where they provide information of which
stocks to select for the day in the client’s mail id such that the client can get the advisory
service online and thus take part in online trading.
References: http://EzineArticles.com/?expert=Mark_Crisp
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Reference from journals and projects.
