Online versus offline trading: What you must know

The cost savings of trading online versus offline cannot be underestimated. Due to their high overhead costs, offline brokers charge higher commission and brokerage rates for their services. 

With India’s online penetration rate booming year after year, with the latest data suggesting that over 243 crore Indians will have internet access by June 2014 (an 18% increase from November 2013), there is a dramatic change occurring in the brokerage industry in today’s day and age: more and more investors and traders are moving away from offline trading and towards online trading.

One might wonder- what exactly is the difference between the two modes of trading?

After all, at the end of the day, all trades are inevitably transacted electronically in order to reach their respective stock exchanges. If that’s the case, then what differentiates online versus offline trading?

Raghu Kumar is co-founder of brokerage firm RKSV.

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Offline Trading

Traditionally speaking, India has been a country inundated with offline brokerage houses. Since internet usage was not widely available until the recent past, traditional “full-service” brokers have set up hundreds (sometimes even thousands) of branches across the country. Each branch usually serves as either a sub-broker or Authorized Person (AP) of the brokerage house.

Offline trading requires a client to call or visit a branch of their broker in order to place their trades. There is also an element of personalized service that offline trading inevitably provides that online trading does not match.
There is a comfort factor that kicks in when the client can speak to their broker, ask for advice/tips on what financial products to buy/sell, and have the opportunity to communicate with someone who has experience in the industry.

Clients usually call their respective relationship managers (RM) and ask their RM to place their trades on their behalf. In exchange, the RM generates commission or a percentage of brokerage from the client’s trades.

Relationship managers usually provide tips and advisory services to their clients. Offline clients usually know their relationship managers on a first name basis; this builds a sort of trust and comfort between broker and client. That being said, more and more investors and traders are moving away from the “old school” way of doing business and moving online. The reason for the switch? Cost, efficiency, and transparency.

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Online Trading

Offline brokers usually incur much higher costs than online brokers. Offline brokers need to maintain branches, relationship managers, dealers (who sit in front of trading terminals and place the orders on behalf of their clients), and generally speaking more staff. Therefore, offline trading is usually more expensive for the client versus online trading since the costs are passed on to the clients through higher commission and brokerage rates.

Online trading requires the client to have just one facility: the internet. Through the internet, a lot more flexibility is offered to the online trader. While he still has the option of speaking to a broker’s customer service department for trading related queries, trading online is preferable since the trader can just get onto the trading platform and start trading without having to go through the trouble of having to speak to anybody on the phone. Not only is this more convenient, but it is also more efficient and, perhaps most importantly, much cheaper.

The cost savings of trading online versus offline cannot be underestimated. Due to their high overhead costs, offline brokers charge higher commission and brokerage rates for their services. When trading online, the client is never taking up the time of an RM so he will not be charged for making a phone call. Another benefit is that an online trader usually has less stringent requirements when it comes to how much capital he needs to begin trading. The “initial margin” requirements with online trading is usually a lot lower than with offline trading.

Online trading allows the client to trade from anywhere and at any time. Since trading software is widely available on mobile phones, tablets, and PC’s, an online trader can literally trade anywhere, provided he has internet access. The benefit of getting real-time quotes displayed on a computer screen versus asking an RM for quotes over the phone cannot be underestimated; prices move so quickly that trading online gives a monumental edge.

Finally, due to the fact that online brokers do not have to worry about having relationship managers and branches, they can channel their resources towards top-notch customer service and online trading tools.

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The Future

Due to the fact that more and more traders are going online, offline brokers are forced to make a switch towards the online model.

In fact, some of them are forced to shut down their retail brokerage operations as exclusively-online brokers are slowly starting to dominate the brokerage industry due to their extreme discount pricing models.

When it comes to choosing between an offline and online broker, there’s never a right or wrong answer.

That being said, if you’re looking for a flexible and cost-efficient option that allows you to trade anywhere at anytime, online trading might be your best bet.