Due to the problems that arose during paper shares, there was a need of a system that would make share transfer, buying/selling of shares, etc. an easier affair.
Therefore in 1996, the Indian parliament passed the Derivatives act, which allowed online transaction of shares, thus making it much easier for the broker and investor.
In the new online Trading system, an investor must open a demat account with one of the Stock Brokers to start trading online.
A demat account is a must for an investor to trade online.
Advantages of Online Trading
Convenience and Flexibility
The biggest advantage of online trading is the convenience factor because you can put buy and sell order even from your mobile as nowadays all brokers are giving online trading application. Besides it gives a lot of flexibility as you can put orders from anywhere whether you are in a meeting or attending some function or traveling.
No Dependence on Broker
Another benefit of online trading is that one is not dependent on the broker for putting the orders because sometimes it may happen that broker is busy or broker is unavailable then you will not be able to buy or sell the stock at the desired price resulting in a loss. Hence online trading has ensured that you earn the maximum profit as there is no time lag between you seeing the price and executing the order which is the case when the broker is involved.
Cheap and Unbiased
It is cheap because when you put orders through the broker they charge from you for putting every offline trades which is not the case with online trading where you have to pay monthly or annual fees rather than paying fees for every order. Besides, it is also an unbiased way of trading because when you ask the broker to buy or sell particular stock than he or she will provide his or her inputs regarding that stock which may be biased leading to change in your decision.
Disadvantages of Online Trading
Risk of Excessive Trading
The biggest disadvantage of online trading is that you may end up in doing excessive trading because what happens in this type of trading is that since you constantly watch price you end up doing those traders also which you shouldn’t have done resulting in loss which is not the case with offline traders where you ask the broker to put order at particular price and when stock reaches that price brokers executes that order and hence the issue of excessive trading never arises.
No Scope of Guidance from Broker
Another limitation of online trading is that an individual will never be able to develop personal relations with the broker who can be of great help when you are in doubt as many brokers give advice regarding stocks which can result in profits for both investors as well as a trader. In simple words, if you have a sound financial knowledge and can take a decision on your own then only you should go for online trading.
Error and Connectivity Problems
Another problem with this type of trading is that since people are not brokers they can make mistakes in putting orders which can lead to big losses for investor or trader. Besides, it is dependent on internet and if there is some connectivity problem then you will be in trouble as you will not be able to place the order which is not the case with brokers where you can put orders on the telephone and it does not require any internet.