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Basics of online trading

business Updated: Mar 19, 2008 23:49 IST
Ramesh Palan
Ramesh Palan
Hindustan Times
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Online trading offers lot of investment opportunities. You can trade or invest in equities, commodities, futures, derivatives, IPOs, mutual funds, tax saving certificates and forex markets through paperless online transactions .

However, you need to thoroughly understand your service provider’s onscreen trading window, before carrying out any such transactions. A slight negligence may cost you a huge monetary loss.

There are two types of basic transactions namely ‘buy’ and ‘sell’ orders. Again, ‘sell’ orders are classified into ‘selling long’ and ‘selling short’ orders.

While there is no confusion as far as a ‘buy’ order is concerned, one needs to understand ‘sell’ order(s) properly before carrying out such transactions.

When you are selling shares that you own in your demat account, you are selling ‘long’. In this case, shares owned by you will be sold out and the profit earned will be credited to your account.

A trader can make money by selling the shares without even owning them—‘short-selling’—and buying them later when share prices fall. In such cases, the first transaction is ‘sell’ and square-off or subsequent transaction is ‘buy’. Traders often resort to ‘short-selling’ to earn profit when they sense a bearish stock market. But, such transactions must be squared-off on the same day before the stipulated time-frame set by the exchange, as technically it is not possible to convert such ‘sell’ orders into delivery.

Selling shares owned by you

If you want to sell the shares from your demat account using the online trading website provided to you by your broker, you must allocate them first, or else, you may end up in ‘short-selling’. In such a case, you need to square-off that transaction by buying them.

If you fail to do so, the system will square-off the transaction at the stipulated time. You may lose money if the share is trading above the price that you sold at. The best way to sell shares from your demat is to visit the demat allocation page of your online trading website and click on the ‘sell’ button placed next to the equity you want to sell. This will automatically take you to square-off dialogue box.

Another way to prevent undesired ‘short-selling’ is to set ‘auto-allocation of funds’ to inactive. In the event of a mistake made by you during trading, such an order will be rejected by the system due to lack of allocation of funds to carry out the transaction. Allocate funds only when you wish to buy shares.

To avoid these types of confusions, some brokerage houses now included separate buttons for ‘sell’ and ‘short-sell’ orders on the trading page of their website.

‘Market’ or ‘Limit’ orders

You should also be aware about buying or selling at ‘Market’ or ‘Limit’ price. You are executing your order at Market price, if you are transacting at prevailing price to meet required quantity of shares.

Market orders are executed almost immediately when they find desired quantity, irrespective of price factor. Disadvantage of this type of order is that trader does not know the price until trade gets executed and is very dangerous in volatile market.

If you are placing an order at a pre-determined price, then you are carrying out a transaction at a price Limit. It is safe to resort to Limit type of order than getting unfavourable results by transacting at Market price. And it is always better to refer the list of available bidders and offers at different prices and quantities before placing orders.