How does online stock trading work?

Last Updated: 21 Nov 2023

If you ask any financial advisor, “How can I achieve financial freedom?”, they will simply say, “earn more passive income than your active income.” Passive income means earning through alternate sources of income such as house rent, return on investment, etc. which would compensate your expenses and help you live a burden-free life. When you reach a point where your investments offer you higher earnings than your primary source of income, you are on the right financial path.

However, how can you earn more passive income? The answer lies in smart and effective investments. Among numerous asset classes and investment tools, the one that has provided the most consistent returns has been the Indian Stock markets

You may have heard about investors who have garnered heavy profits when they only started investing small amounts in the stock market. If you are looking toward achieving the goals of your financial plan, investing in the Indian stock market is one of the ways to achieve it. However, to begin your investing journey the right way, you must understand everything about online stock trading.

What is online stock trading?

There was a time when the Indian stock market worked on an open outcry system, where the investors had to be physically present at the stock exchanges to buy/sell shares they held as physical certificates. Fast forward to now, the stock trading process is completely digital.

Online stock trading enables investors to buy, sell and hold shares on the go of any publicly listed company using digital platforms and online trading tools. You can buy and sell shares from your PC and laptop without visiting the stock exchanges.

Types of online stock trading

Investors try investing in various types of online stock trading to find their niche and increase profits. Every one of them differs in its process, method, and aim. The types include:

• Day trading: Traders who engage in day trading or intraday trading are called day traders. In this form of trading, the purchase and sale of stocks take place on the same day, i.e. all transactions are bought and sold on the same day. This type of trading demands quick thinking and immediate action and is not suitable for beginners who are new to the stock market.
• Arbitrage: This technique focuses on the slight differences in the prices of financial instruments. Whenever there is a difference in the price of a financial instrument between two markets, the trader or the arbitrageur will buy the securities at a low price and sell them back for a higher price.
• Pattern Trading: Volatility is a distinguishable feature of the market. The stock market graphs go up and down, leading to the formation of various patterns known as chart patterns. Pattern trading provides more consistent and profitable trades in the long run.
• Swing Trading: This is a technique that focuses on the price of a stock at the beginning of the day and the stock’s closing price for the same day. This method focuses on the price differences and the movement in the stock.
• Short-term trading: This type of trading is when the shelf life of the trade is one day to a few weeks. Short trade starts by buying financial instruments and holding them for a period that can last until a few weeks. The trader will create a sell position in this technique.
• Medium-term trading: The trade conducted within a few weeks to a few months is known as medium-term trading. Medium-term trading indicates the stock has the potential to reach a high position in the future.
• Long-term trading: This trading technique is mostly used for stocks that have a long-standing relationship in the market. These stocks can become profitable by the day, so the holding period of these stocks ranges from a few months to a few years.

How does stock trading work for investors?

Currently, the only way you can trade in stocks is through online platforms. You would need an internet connection and an investment budget to go ahead with the process of investing. As an investor, you can invest in two types of stock markets:

• Primary Market: A primary stock market is a place where a company first gets registered to raise money and issue its shares for the first time. The goal of being publicly listed on a primary stock exchange is to raise money and fund future company operations. This process of raising funds for the first time is known as an initial public offering.
• Secondary Market: Once a company’s new securities have been sold in the primary market, they are then traded in the secondary stock market. On the secondary market, investors can exit their IPO investment and sell their shares. Transactions on the secondary market mostly comprise trades where one investor chooses to buy shares from a separate investor at the prevailing market price.

How can investors do online stock trading by opening an IIFL Demat and trading account?

As the process of trading has gone digital, every investor must open a Demat and trading account. A Demat account is used to hold the shares you buy, while the trading account is used to carry out trading transactions. An important step in this process is to choose a qualified stockbroker such as IIFL to open a comprehensive Demat and trading account. The process to open a Demat cum trading account with IIFL is as follows:

1. Visit www.indiainfoline.com or the IIFL demat account app. Click on open a Demat account» Enter Basic details.
2. You will receive a one-time password (OTP) on the mobile number.
3. You will also receive a link on your registered email id. You need to enter the OTP received on your registered email id.
4. After verifying the OTP, fill out the online Account Opening Form.
5. Your Relationship Manager will then contact you for the necessary documentation.
6. Once the documentation process is completed, and the forms are received at HO, the account will be opened within 24 hours.

Online stock trading strategies

When there is a ton of profit to be reaped, investors get carried away and give less importance to implementing the right stock trading strategies. However, getting carried away while trading on the stock market can cost you dearly in losses. Here are some online stock trading strategies to mitigate losses and increase your profits:

As India is witnessing a digital transformation with over 700 million internet users, investors today can benefit from IIFL’s technology-backed digital platforms and investor-friendly tools such as trader terminal, TT web, and TT Iris. With over 25 years of experience and having served over 22 lakh customers, investors with a free Demat cum trading account are offered best-in-class online stock trading services. All you have to do is open a Demat cum trading account through a few simple steps and you are good to go.

• Basic Knowledge: It is always wise to learn about the basic stock market jargon and the factors that can affect stock prices. You can read numerous other IIFL blogs to learn about the stock market. It will enable you to make informed decisions while investing.
• Avoid herd mentality: When it comes to the stock market, you should always make your own informed decisions and avoid investing based on people’s perspectives. As everyone has a different financial situation, budget, asset allocation, diversification, and risk exposure, they should never tell you where to invest without analyzing your factors.
• Don’t get attached: Emotions are at the core of every bad trade. You must rely on logic and research facts and figures. It may be that one stock has given you good returns previously, but if the company numbers are bad going forward, it is never wise to hold the stock based on emotional attachment.
• Consult your stockbroker: The best people to offer financial advice are your stockbrokers. IIFL employs a host of expert financial advisors who analyze all the financial factors before offering insight to let you make informed stock market decisions.

Frequently Asked Questions

What is the importance of online stock trading?

Online stock trading allows investors to benefit because of the following reasons:

• Seamless and quick investing process, anywhere and anytime.
• It is more time-efficient than the open outcry system.
• It is also more affordable as stockbrokers such as IIFL offer a free Demat/trading account with zero AMC.
• More transparent and secure as digital transactions can be monitored in a better way.

What are the steps in online share trading?

Here are the steps in online share trading:

• Open a Demat cum trading account with IIFL.
• Login to the account on IIFL’s website or IIFL’s market app.
• Choose the shares that you wish to sell or buy.
• Select the quantity and the price at which you want to buy a share versus sell it.
• Complete your stock market investment transaction by transferring the money/shares, and you will receive money/shares.