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With multiple online platforms, trading on the National Stock Exchange, BSE and other markets is possible — all from demat and trading accounts accessed through your computer or mobile phone. But while online trading is a versatile way to invest your money, it does carry some risk. Find out how to start trading online and what your many options are.
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Trading is a more involved approach to investing and is also referred to as buying shares or other investment products.
Shares, or stocks, are partial ownership of a company. Instead of borrowing money to raise capital, companies sell shares to raise funds for expansion.
Online trading is a broad term that refers to different ways to buy and sell assets, such as shares, online. Here are some of the more popular methods:
Traders buy and sell company shares through stock markets, which provide continuous updates on the prices of those shares. The value of a company’s shares changes daily, so shareholders aim to make a profit by buying shares when they cost less and selling them when they cost more. You can expect transaction fees for buying and selling.
Options are essentially a bet on how you think a stock will move within a set time. If you purchase a contract of 100 shares, that gives you the right, but not the obligation, to buy or sell a stock at a certain price, called the strike price, within a certain time frame. Here are two options:
Call. If you believe the price of a stock will go up by the expiry date, you buy a call option contract. This gives you the right to buy shares at the strike price. If the share price is higher than the strike price, either buy the shares at a discount when the contract expires or buy and immediately sell the option for a profit.
Put. If you think the price of a stock will go down by the expiry date, buy a put option contract. This gives you the right to sell the shares at the strike price. If the share price drops below the strike price, you could buy shares at market price and sell them at the strike price.
Bonds are issued by companies or governments to generate cash flow, finance debt, fund investments and more. Bonds have predetermined term lengths and pay interest (also called the coupon rate) at set intervals for the length of the term. Once the bond reaches maturity, it can be cashed for the principal amount.
A bond’s value can fluctuate based on the current general interest rates, so some traders buy and sell existing bonds on secondary markets. If general interest rates drop, the market value of bonds typically increases, whereas if they rise, the value of bonds typically drops.
Foreign exchange (forex) trading is the process of buying and selling currencies. Unlike the stock market, the forex market is not one central exchange but rather a network of transactions between traders. Despite being decentralised, forex is the largest financial market in the world, with over US$5 trillion in trades conducted daily. In India however, traders can only trade certain rupee currency pairs. And since exchange rates change throughout the day, traders are able to make money by buying low and selling high, just like the stock market.
Futures are based on buying or selling stocks in the future with an agreement to buy or sell the stock. When you enter into a futures contract, you’re making an agreement to buy or sell an asset at a set price on a certain date.
Swaps, like forex trades, are not completed on exchanges. Instead, they are done as over the counter transactions between traders, businesses or financial institutions. Swaps are essentially a contract involving cash flows or liabilities, like loans or bonds. However, the principal amount does not actually change hands. In most cases, one cash flow is fixed, while the other is variable, often based on a benchmark interest rate, floating currency exchange rate or index price.
Crypto, or digital currency, trading is very similar to stock trading in that it involves buying or selling assets to make a profit. Just like stocks, there are numerous cryptocurrencies out there, allowing you to pick and choose where to invest your money. Once you purchase cryptocurrency on an online exchange, you can either sell it, hold on to it, or buy other assets like stocks, other cryptocurrencies or even goods and services.
Forwards trading is just like futures trading but with more flexibility. While futures contracts include a set number of a specific asset at a predetermined delivery date, forwards contracts allow you to customize the terms. The contract holders make an agreement to buy or sell the asset, aiming to make a profit by predicting price movements.
There was a time when all trading was done through brokers, which made it tough to get into if you didn’t have the money, time or connections. Today, there are all sorts of online trading platforms and apps that offer benefits that were unheard of 20 years ago. Some of the benefits on online trading are:
Online trading allows almost anyone to start investing, but that doesn’t guarantee that you’ll earn money. Just like any other investment, there are a few things to watch out for:
While online trading can seem overwhelming, getting started is actually very easy. However, with such a steep learning curve, it doesn’t hurt to get a little practice before you jump in. Consider paper trading until you understand the basics or graduate to an online trading account, then consider charting software for more advanced trading.
To start trading, you’ll need to have a demat account and a trading account. Demat accounts hold assets you have purchased, while trading accounts are used to trade them. Fortunately, you can conveniently access both seamlessly, by creating a demat account and then creating and linking a trading account to it, through the same platform.
Several platforms can provide this service, and you’ll need to decide which platform is best for you. The process will vary for each platform, so make sure to consider ease of use when choosing a product. Compare your options to find a platform that offers the features, fees and capabilities that you want, then sign up to start trading.
The steps will vary depending on what type of trading you want to do, but will often be:
Paper trading is a great way to get a better understanding of online trading. It allows you to make theoretical trades based on simulated or actual market data so that you can practice trading. It’s easy to get started:
For more advanced traders, charting software and market research reports may improve your trading abilities. They’ll provide a more in-depth look at various markets and can help you develop trading strategies to reach your short and long-term financial goals.
With so many platforms and online trading products available, it’s important that you compare your options to find the right one for your situation:
Online trading platforms make it easy to open demat accounts and invest in stocks, bonds, foreign currencies and other assets at any time, no matter where you are. Most offer multiple ways to trade, creating new opportunities to earn money and allowing you to diversify your portfolio. But online trading can be complicated, so make sure you understand how it works before diving in. Once you’re ready to trade, compare your options to find a platform that suits your trading needs.
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