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.
Mentioned below are some of the advantages of trading online:
1) Easier and convenient way to own shares
2) Immediate transfer
3) Zero stamp duty on transfer of shares
4) Safer than paper shares, eg, fake signatures, delay, thefts, etc.
5) Lesser paperwork for transfer of securities
6) Less transaction cost
7) No "odd" problems. Even a single share can be sold.
8) DP registers a change in address with all companies. No need for the investor to contact the companies immediately.
9) DP transmission of securities, thus eliminating the need of notifying the companies.
10) Automatic credit in demat accounts
11) Both equity and debt instruments can be held by a demat account
The depository system aids in reducing the expenditure of new issues due to lesser printing and distribution costs. It increases the efficiency of the registrars and transfer agents and the secretarial department of a company. It provides better facilities for communication and timely service to shareholders and investors.
The disadvantages of online trading are stated below:
1) Investors, who are trading for the first time, go with the flow and get immersed in technology and actually temporarily forget that they are actually using their real money.
2) There is no relationship that of a mentor between a professional broker and an online trading account holder, thus leaving the investor on his own to make choices of the right shares.
3) Users who are not familiar with the ins and outs of the basics of brokerage software can make mistakes which can prove to be a costly affair.
4) This is like any other financial strategy, where your commitment to online trading takes research and dedication to make sure by yourself that everything is up to par. You have to take time out to do your own research where you will have to exceed a great learning curve to make some money from online trading a possibility.