How Online Share Trading Works?

Online share trading has changed the world of trading forever. Now anyone can invest in the stock market, and all they need is a Personal computer or a smartphone along with an Internet connection. With the advent of online trading, small and individual investors are no more dependent on the intermediaries and stockbrokers, thus leading to lower transaction costs and more transparency.

To start online trading, a user needs a trading account and a demat account. For a smooth transfer of money and shares, both these accounts are linked to a savings account. However, before one starts trading it is important to understand how online share trading works.

This not only helps a trader with insight into the working of the stock market but also helps them in designing strategies to trade stock.

First and foremost thing to understand how online share trading works is to know about the parties involved in the stock market.

How Online Share Trading Works – Basics

Like with any other business, stock trading also has its own risk, and thus, it needs to be regulated to safeguard the interest of the investors. The Security and Exchange Board of India (SEBI) regulates the secondary and primary markets in India. It was established as a regulatory body of stock markets in 1998.

SEBI is responsible for both the development and regulation of the market.

Another important stock market entity is the stock exchange. The stock exchange is basically a platform that offers facilities that support trading. It must be noted that a stock can only be traded if it is listed on any exchange.

In simple terms, it can be referred to as a meeting place for the buyers and sellers. The exchange makes sure that the trade is fulfilled and is settled. Even if the seller doesn’t have the required stock, it is the duty of the exchange that the buyer gets the share.  

Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the premier stock exchanges in India.

Then there are stock brokers and the brokerage firms, who are registered with the stock exchange. These are the entities that a retail investor mainly interacts with. They serve as an intermediary between an investor and the stock exchange.

Now, after knowing the parties involved in the stock market, it is also important to know the significance of online share trading platform to understand how online share trading works. Your online share trading platform works through your broker, allowing you to buy and sell shares.

A broker is primarily a licensed intermediary that trade stocks through the exchange. To make transactions, a broker can either be on the trading floor or make trades via phone or electronically.

Nowadays since your online trading platform acts as your broker, only a small fee (or a commission) is charged to buy and sell stocks on your behalf. Even though you use a virtual broker, but the money used is real. Also, it won’t be wrong to say that you yourself act as a broker by deciding on the stocks to buy and sell.

Now that you know the importance of your trading platform, let’s move further to understand how online share trading works. ‘Stock’ is undoubtedly the most used phrase in trading. So, before moving forward, let’s understand what it is.

When a company needs money for expansion, it ‘goes public’ or makes an initial public offering (IPO) of common stock. Thus, buying and selling of this common stock are how online share trading works in its most basic form.

How Online Share Trading Works – Buying & Selling

In share trading, investors purchase shares of the public companies and then sell those shares. When an investor buys a stock, it gives them part ownership in the company. And, when they sell, they sell the ownership too. Though share trading is more than just buying and selling, it is the most basic function of the stock market.

Usually, the company only offers a fraction of its total ownership for sale, but the price set for the stock helps in the valuation of the entire company. And, once the stock is listed on the exchange, its price can even move independently, i.e., without any connection to the performance of the stock. So, a trader must always keep in mind that the actual company’s success is no surety that the stock will rise.

Price of the stock is based on the law of demand, and hence, reflects the changes in the supply and demand. This is the most basic concept explaining how online share trading works. When a stock is desirable – be it for any reason like good results, any good news, etc. – its demand rises, resulting in the jump in the price.  

On the other hand, if investors do not want own it –again for any reason like negative news, panic selling, etc. – the demand goes down, and hence, the drop in the price.

It is not that the stocks, whose price drop, will remain there forever. In fact, such stocks have more potential to offer big returns. Investors like Warren Buffett are known for picking suck stocks, i.e., unpopular stocks with the potential for strong earnings.

Like with any other marketplace, share trading is also dependant on the buyers and sellers. The buyers and sellers trade already issued shares, i.e., sold by one investor and bought by another. To purchase a stock, an investor using their online trading platform can put a market order to buy at the current price, or a limit order to buy after the stock reaches a certain price.

Your buy order is then transferred to the exchange. The order is then matched with the seller, who has put the same stock for sale. After the buyer and seller are fixed, a price is finalized (if not already fixed). Then the exchange notifies to your broker that the order is confirmed, and the message is then conveyed to you.

How Online Share Trading Works – Conclusion

It must be noted that before the order is confirmed details of the buyers and the sellers are verified to ensure that the parties involved are not a fraud.

After the trade is done, the exchange transfers the ownership of shares, and this process is called settlement. Prior to the advent of online trading, the settlement took weeks to settle, but now, it takes just two working days, i.e., T+2. For instance, if you have traded today, the shares will get deposited in your demat account in two working days.

By going through the above article you should get the outline of how online share trading works. How online share trading works is pretty vast subject and involves numerous intricacies. However, these intricacies are not as important as the trading point. And what is important, now you already know, so it is all up to you to trade and make money.

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