Mumbai housewife Sarita Chaudhury is glued to the Internet for the better part of the day. No, she isn’t surfing because she has nothing else to do. Nor is she hooked on any social networking site. She is just one of the many in India’s financial capital who buy shares, selling them the same day, in the hope of striking instant riches.
Chaudhury is among the thousands of day traders, or those who trade in shares by buying and selling them on the same day. And if they’re raking it in, it’s thanks to online trading.
Online stock trading caught on some years ago and has revolutionised the way small investors invest in the stock market. From the comfort of their homes or offices, small investors can bet on the market. They’ve been aided by online investment sites, provided by companies or financial bodies like Reliance Money, Infrastructure Leasing and Financial Services Ltd (ILFS Investsmart), ICICIdirect.com and Indiabulls, all of which provide an ideal, secure, hassle free and cost-effective interface between the consumer and the stock exchange.
Trading through a personal computer is fairly simple: link your trading account (provided by an online site) to your dematerialised (demat) account (where shares are held in a non-physical form) and your bank account. Then log in to buy and sell shares, bonds and so on, using your unique user identity and password.
But one question surfaces here — just how safe is your online transaction' Are there any chances of an e-brokerage firm pulling a fast one on you' “Online trading is cent per cent safe,” declares Sudip Bandyopadhyay, CEO of Reliance Money, “provided the e-brokerage firm is a reliable one with credibility in the market.” If small investors are confident of moving their very real money in a virtual gridwork that is constantly at risk of being hacked into, it is partially because of security measures such as password protection that are heavily encrypted. Securities and Exchange Board of India (SEBI) guidelines specify that everyone who trades online must change his or her password every fortnight.
That can be irksome for those who trade. Reliance Money, however, has gone a step further. Says Bandyopadhyay of Reliance Money: “Our customers don’t have to take the pains of changing their passwords every two weeks or so.” The company hands out a security token to the customer once he or she opens a demat account to trade in shares electronically. “The token is light and half the size of a visiting card. It displays a six-digit number, which changes automatically every 32 seconds. So apart from his user name and password, the customer has to key in that number — which doesn’t remain constant — whenever he logs on,” he explains.
Retail investors have been logging on at a fast and furious pace — ICICIdirect.com alone has 13 lakh customers. “In the last one year, the growth has been between 40 and 50 per cent,” points out Anil Kaul, who heads ICICIdirect.com’s retail brokerage division.
Small-time investors stand to gain enormously from online trading. “Earlier, they got short shrift as preferential treatment was meted out to the sharks in the market,” notes Prithvi Haldea, managing director of the Delhi-based Prime Database, which tracks the new share issues market. Haldea adds, however, that there is a flip side to this. “Online trading can lure novices who have no understanding of the share market and get them addicted to it. They can then end up burning their fingers rather than milking the boom in the economy.”
Another advantage of online trading is that the contract note for each transaction is received within 24 hours in one’s e-mail account, with a notification also sent over the mobile phone. One can take up any discrepancies immediately should the need arise.
Yet if you’re looking at online trading, it would be prudent to bear a couple of things in mind. First, bargain hard with the brokerage house on the brokerage fee. Although some such as Reliance Money have a flat brokerage fee which is independent of the number of shares purchased, others have slightly flexible brokerage fees. “In such instances, investors can haggle over the fee, which in any case is substantially lower than that charged by brick-and-mortar brokerage houses or for booking orders over the phone,” says Kaul.
Secondly, as the trading, demat and bank accounts are integrated, an investor’s funds will automatically get blocked if he or she pays the entire amount while placing an order for shares. So it is always safer to trade on margin — here, the investor makes an upfront payment of a percentage of the total investment he or she wishes to make and pay in full once the shares are delivered to his/her account. Trading platforms provide this option of trading on margin.
Thirdly, investors should put off injecting fresh funds in their bank accounts till they get a confirmation of the trade having gone through. “It is advisable to keep a zero balance in the bank account before any transaction is made. A number of brokerage houses in association with one bank or another offer the zero balance account facility to their clients. In that case, the client can opt for this bank account rather than linking his regular savings bank account to the online trading account,” advises Bandyopadhyay.
Finally, Kaul of ICICIdirect.com and Bandyopadhyay of Reliance Money sound another word of caution. Says Bandyopadhyay, “Even if it is an online investment, a medium to long-term plan varying between four and eight years is always preferable to short-term investments.” Kaul weighs in, “No consumer should abdicate his money to someone else or, for that matter, give out his password and user name to any one whosoever. It is also imperative to study the capital market, participate in investor advisory workshops and seek advice from an equity fund manager before clicking away.”
With online trading holding out more promise than risk, several broking houses — of the mom-and-pop shop variety — have climbed on the virtual bandwagon. Ajay Agarwal, managing director of the Calcutta-based Eastern Financials Ltd, and Rajesh Agarwal, vice-president of the Calcutta-based C.D. Equisearch Private Ltd, reason, “There is little chance of forgery and no room for bad delivery caused by signature mismatch, postal delays and loss of certificates in transit. Brokers are a relieved lot and the manpower needed to handle dissatisfied clients is minimal.”
For all this, however, one basic safety has to be ensured. Enjoy the bulls on the run, just don’t think you are a matador. That could be fatal.