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Saturday, December 1, 2012

Top 5 Online Trading Mistakes - Part I

With the advent of Electronic Trading, almost all investors and traders now use Online Stock Trading websites to Invest and Trade in Stocks. Online Stock Trading Websites offer Do-It-Yourself options to Buy and Sell stocks and are very popular among retail investors. Few retail investors actually pick-up the phone to call the broker’s office to request trade on their behalf. It’s much easier to login into Broker’s online website, place the trade yourself, watch it getting executed and feel the excitement!

However, there are a few scenarios where Online Investors can make a costly mistake while trading or investing in stocks themselves. Most of the investors access their trading accounts only once in a while, maybe just before leaving for their office, and are often in a hurry to place an order. Occasional retail investor is not aware of all the options available in online websites and there are some unique situations where you can actually lose money even by placing an order to invest online. In this article, we look at Top 5 Online Trading Mistakes that investors commit Online and what should be the correct course of action for an amateur investor or trader.

Online Mistake #1 - Ignoring the Limit Order Type

Imagine a situation, where you have just received a recommendation to buy or sell a stock and you login into your online broker to quickly place a trade. You see two Options or Order Types to place an order – Market Order and Limit Order. Retail investors do not appreciate the difference between these two order types and would leave the default option – Market Order – and place their trade. This is a costly mistake and can set your portfolio back by a good 1%-3% over a lifetime of investing. Let’s look at the underlying mechanics of these order types to understand better:

A Market Order type quickly places your trade to the exchange and matches with the best available option available in the exchange order book. Simple speaking, if you want to buy 100 shares of Reliance, and place a market order, it will get matched at the exchange with the Seller offering the Reliance Shares at lowest price. So your order gets executed immediately, but what is happening behind the scenes is that you have no control over the price you get for your purchase. It gets executed at whatever is the best price available in the market.

A Limit Order gives you the power to control the price of your trade. When you select this option, you will also have to mention the Limit price for the trade you have placed. Let’s take the earlier example of buying 100 shares of Reliance. If you select Limit Order as the Order type, you will have to enter the highest price for Reliance that you are willing to pay. If the stock is trading at Rs 800 per share, you can place a limit of Rs 800.5 to take an example and none of your purchase will happen over Rs 800.5. You can even mention 799.5 or any lower price for Reliance, and your purchase will happen only below this price. Thus during the intra-day volatility, you might get your shares at a lower price that the current market price.

The power of selecting Limit Order Option comes at a time, when you are buying Mid-caps or Small-caps and there is limited liquidity for these stocks. If you place a Market Order option, you might end up purchasing the stock at a much higher price than the current price because there may not be a seller available close to current market price. So you will not be even aware of the high price you paid for your purchase and over a lifetime of investing, just selecting the correct order type will save you anywhere from 1% to 3% of your investment corpus. Just remember, professionals never select Market Order type, they dictate their price to Buy and Sell and always prefer Limit Order Type for their investments.

Online Mistake #2 - Falling for BTST

BTST (Buy Today, Sell Tomorrow) is touted as a hot trading product by brokers and is often pushed to retail investors citing high profits and low risk method to trade. However, when you sign for BTST, you are asked to sign for a long list of Risk elements which covers the broker completely, but leaves you exposed. You as a retail investor might get trapped if there is an issue with the BTST trade. Let’s look the risks involved in BTST.

When you purchase a stock, it takes minimum of 2 days for the stock to come to your Demat account. So doing a BTST, i.e. buying the Stock today and Selling it tomorrow is not a natural thing to do. You are actually selling something which is not yet in your possession. So why do brokerages allow this and actually push the product to you and encourage you to do it. Simply because they earn their commissions today, when you buy and another commission tomorrow when you sell. And also because you have already signed on risk papers, so all risk belongs to you and not to the brokerage house or the exchange, if anything goes wrong.

What all things can go wrong in a BTST? If the Seller party which promises to sell the stock to you defaults, then you will not get the stock in your account. But, by doing BTST, you have already sold the stock the next day and hence you are also in risk of doing a default now. So the brokerage house, would try to procure the stock during an auction process, and hence you may end up paying much higher for the stock you sold than the sale price you committed to. If unfortunately, the stock is caught up in consecutive upper circuits, and there are no sellers available for next few days, the penalties can be much higher for you.

BTST is anyways not a natural way to trade. If you like a stock, and think it will go up, there is no harm in waiting two days rather than one and then selling the stock, once you actually have the stock in your demat account. Online brokers try to limit to BTST to only highly liquid top 200 stocks, but if anything goes wrong, the entire risk is yours, so risk-reward is skewed against you in a BTST trade.

Click here to go to Part - II of this article for rest of Top Five Mistakes!


  1. Thanks for the very informative article which many retail investors are not aware of.


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