How Online Trading Works?


Initially, when I started trading, I chose call & trade service. Part of it because I was doing a job, so didn’t have time to execute trades on my own. Another reason was I didn’t have slightest idea about what is online trading. And last reason was I wanted to play on safer side.

As promising as online world sounds, people face issues, like me, when it comes to put trust on online trading. Especially newbie traders prefer to be on a safe side, thinking that it is not an online shopping, it is trading or investing we are talking about.

But in this high-tech world, if you won’t switch to online trading, you have to rely on others to take your trading decisions. No matter, how smart the executives are, at some point you will need the help of technical indicators to decide your trades.

If you are worried about not knowing anything regarding online trading, I am going to dissolve it soon.

Today, you will learn the step-by-step process of how online trading works. You will see the depth of simplicity and found it the easiest way of trading.

Online Trading Simplified in 7 Step Process

Step 1: Opening Demat and Trading Account

First of all, you open online demat and trading account with your selected stock broker. You submit an identity proof, address proof, and your passport size photo for a complete account opening process. Next, you pay some charge for opening an online account. Each stock broker charges a different account opening fees.

Let’s take an example to understand the whole process. With each step explained, we will take the same example further like a story.

For e.g. I opened an online trading and demat account with Zerodha. I paid Rs.300/- for opening demat account in Equity. For commodities, you have to pay Rs.200/- extra. I uploaded documents online. After completion of online process, they sent a confirmation and welcome email with details regarding physical copies of my proofs I have to send via post.

Note: With completion of online process, I can start trading, but physical copies of proof are necessary for secure money transfers.

Step 2: Access to Online Portal

After completing the whole account opening process, you will be given an access to online portal from where you can buy or sell shares. You will be given a client code, which you will use as your username for login, and password you have to change later.

E.g. with Zerodha, I got access to Zerodha Kite from where I can buy or sell shares and set my watchlist along with technical indicators I needed.

Step 3: Money Transfer

If you have already decided on which shares to buy or sell, obviously, you will transfer money first to execute trades.

If you haven’t decided, first you will gain some knowledge then only you will start trading. For which you will transfer money.

Brokers allow online money transfer through various modes like Net Banking, UPI, and Debit Card. Mostly its Net Banking and UPI. It takes a minute to transfer money from bank account to demat account.

E.g. Zerodha allows fund transfer through Net Banking and UPI. Let’s say I transfered Rs.4000 to my Demat Account for trading.

Note: some brokers charge extra for bank transfer.

Step 4: Order Execution

Once you have balance in your demat account, you are ready to buy or sell some shares. Research some shares through your online portal, buy or sell the one you liked. Amount of shares will be deducted on the spot from your demat balance. But it won’t show you brokerage charges at the same time. It comes later.

E.g. From my Rs.4000 balance, I bought 10 shares of Marico which cost me around Rs.3780/- at the time.

Step 5: Contract and Brokerage Charges

As I said, brokerage charges won’t show up at the time of order execution, but you will receive a contract note at the end of the day via email. It is a contract of your trading with all details on how much you paid for shares and brokerage charges. The contract will show you net amount paid including charges.

E.g. I received a contract note from Zerodha depicting net amount paid by me which was Rs.3784.54 (4.54 as brokerage and transaction charges)

Here’s how it looked like:

Note: Each broker has different brokerage and transaction charges

Step 6: Complete Transaction

Complete transaction is two reverse transactions on a trading platform like purchasing shares and then selling it. Also called as opening and closing the position in trading world. Amount will be credited to your demat account but you can’t transfer it immediately as it’s not a final settlement from broker’s side. However, you can use the amount to purchase other trades.

At the end of the day, you will receive contract note of your trades with brokerage charges applied and final amount received.

E.g. As you know I bought 10 Marico shares earlier. After a few days, I sold it. Call it a closing position. Rs.4995 credited to my demat account on the spot. At the end of the day, I received the following contract note reflecting Rs.4989.29 (brokerage charges deducted) as final amount received.

Step 7: Final Settlement

It takes 5 minutes to transfer money from bank account to demat account. And around 6 days to transfer money back from demat account to bank account. That’s because trading account takes 3 business days to settle final amount in your demat account for closing a position. Another 1-3 business days to transfer money from demat account to bank. That’s called final settlement.

This is the end of whole process.

The process starts again from Step 3 to execute trades.

Wrapping Up

This is how online trading works in simple terms. If you explore more, you will find that there are many functions playing important role for a trader like money management factors, different platforms offered by brokers, stop loss, target setting, etc. All these steps have their own processes. To get started, you will have to go through the above mentioned process. Rest is upon you.

Also Read:

How to Start Trading Online?

How do I Choose Stock Broker in India?

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