If you are an investor or trader, chances are that you have come across the term "online trading".
Online trading is nothing more than the act of placing trades through your broker on the internet. If you have an account with any broker, there is a very good chance that your trades are being placed online.
That being said, just because your trades are being placed over the internet, it does not necessarily mean that you are the one placing the trade online. There very well could be an intermediary or middleman placing the trade on your behalf, and in turn, collecting commission/brokerage for the services. In that case, the trade would be classified as an "offline" trade since you are not directly placing the trade through the internet. It is easy to confuse the terms "offline trading" and "online trading". For that purpose, it is important to understand the differences between the two.
In order to understand the differences, I would take you through some examples that will help you understand the advantages and disadvantages with online trading versus offline trading.
Focus on the flow of the trade
If you have an account with a broker, think about how your trade is being placed. If you are not directly placing your trade through trading software installed on a computer, mobile or tablet, you are not trading online. Many a time, investors and traders assume that they are trading online because their broker tells them so. The reality of the situation is that if you are calling anybody to place your trades on your behalf, you are an offline trader.
Now, what are the benefits of online trading? For starters, it is tremendously cheaper than offline trading. Offline brokers assign "relationship managers" to their customers. A relationship manager has many roles, including helping you out with your questions and account opening formalities, but makes a sizeable percentage of his income through providing tips to his clients (giving advice on what stocks to invest in) and ultimately, placing trades on clients' behalf. In return, the relationship manager earns commission or a percentage of the brokerage paid by the customer.
Therefore, there is a basic conflict of interest that arises with relationship managers. On one hand, it is in their best interest to advise their clients with the best tips and advisory services possible; on the other hand, their income is dependent on how many trades (and the size of the trades - also known as turnover) their clients do. That is why so many relationship managers have difficulties when the market is not trending upward: how do you advise customers to buy a stock when the market is trending downward?
Online-only brokers, on the other hand, are a new crop of brokers that generally do not offer relationship managers. While customer service is provided through a centralised team, customers are generally not provided a 'relationship manager'. Instead, they can call the broker directly and get their queries resolved. When it comes time to placing their trades, they simply log-in through their trading software on their computer/mobile/tablet and place the trades themselves.
The end result is that, not only does the customer not have to worry about a conflict of interest from a relationship manager, but he also saves on brokerage costs tremendously. Offline brokers that have hundreds, sometimes thousands, of branches across the country with multiple thousands of relationship managers inevitably have much higher costs; therefore, they pass on the costs to their customers. Online brokers do not have to worry about these types of costs; therefore, the brokerage charged by an online broker is usually significantly lower than an offline broker.
Let's say you have an account with a traditional, 'full service' broker who provides you a relationship manager. The relationship manager, after some negotiations, promises to offer you unbeatable brokerage rates. In reality, the more trades you do, the lower you can negotiate your brokerage rate down with your relationship manager. This is very unfortunate since a genuine investor who might hardly trade a few times a month is likely going to be charged a hefty brokerage rate.
For example, your relationship manager might offer you '5 paise' brokerage for intraday trades, which translates to 0.05 per cent brokerage. To put that in perspective, if you were to purchase 1,000 shares of Reliance Industries at a price of 860, you would be paying your broker (Rs. 860 x 1,000 x 0.05% =) Rs. 430 in brokerage.
In fact, many offline brokers charge an upward 50 paise brokerage for delivery trades. To put that in perspective, the same Reliance Industries example would come to Rs. 4,300 in brokerage costs for a purchase and another Rs. 4,300 in brokerage costs for selling the shares.
Exclusive online brokers charge much lower brokerage rates. If you are serious about trading online, it is recommended that you stick to a broker that has little to no overhead costs. Overhead costs can include relationship managers, hundreds of branches, AMCs (annual maintenance costs), and all sorts of other 'hidden costs' that an online broker would not have.
In order to trade online, the first step is to open an account with an online broker. You should do research and find a reliable, online broker with low brokerage costs. Here are a few things to look out for when searching for an online broker.
- Fund safety: Ensure that the broker is a registered member with all major stock exchanges and has certificates from capital market watchdog Securities and Exchange Board of India (Sebi) and/or commodity market regulator Forward Markets Commission (FMC).
- Transparency: Ensure that the broker spells out all rules, regulations, and costs on paper.
- Recorded phone calls: Ensure that the broker has a recorded line for all phone calls so that each and every phone call placed between you and the broker is recorded. This ensures that, in case the broker does any trade on your behalf, there is proof that your verbal authorisation was given.
- Verbal authorisation: Ensure that the broker cannot place any trades without your verbal authorisation.
- Testimonials/reviews: Search online to see how others rate the broker. You can also check with stock exchanges to see how many complaints have been issued so far against the broker.
The rest is up to you. From here on, there will be no conflicts of interest between yourself and a relationship manager; you are self-empowered to make your own trading decisions. Not only will your trading costs be significantly lower than it would be if you were to trade with an offline (or a hybrid online/offline) broker, but through the experience of trading online and making your own trading decisions, you will be able to educate yourself and understand how to earn through your own trades.
It all comes down to your needs. If you are satisfied with your current broker and earning a healthy return on investment, then there is probably no need to make a switch. But if you are looking to avoid unnecessary costs and join the next wave of brokers who charge minimal fees, it might be time that you cut out the middleman, join an exclusive online broker, become self-empowered, and finally start to make your own investment decisions.
Raghu Kumar is the co-founder of RKSV, a leading low-cost broking firm. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.