When the stock market came into existence, you had to carry out trades physically. An open-outcry system was used where traders used hand signals and verbal communication to buy and sell shares. This outdated system ended up being too sophisticated and chaotic. It made it difficult for traders to make efficient trading decisions. It all changed when trading took place with the help of the Internet. You may be wondering now, “What is a trading account?” Let us discuss them.
Define Trading Account.
In India, you need a trading account to carry out trades. It’s similar to a Demat account, yet entirely different. You no longer have to be physically present to carry out trades. Instead, you can sit in the comfort of your home and use a platform provided by your broker to access your trading account and trade in the stock market. While a Demat is used to store various securities like shares, government bonds, mutual funds, etc., a trading account is used to buy or sell these securities.
Objectives of a Trading Account
After understanding “What is a trading account,” let's understand its objectives. A trading account is beneficial. Following are the objectives that are fulfilled with the help of the trading Account
You can keep track of orders placed through the trading account. It includes orders that have been executed, partially executed, and failed orders. The whole list is also called an Order book.
You can monitor and compare all your trading activity to the previous years with the help of the trading Book History. It helps you know how much growth has taken place in your trading.
It provides information on all stocks on every trading day from start to end.
Your trading helps you determine your stock turnover ratio. It helps to understand if the company you’ve invested in is successful or not.
Modes of Opening a Trading Account
To understand “what is a trading account” in detail, you will also have to understand the modes of opening a trading account. You can open a trading account offline and online. An offline trading account can be cumbersome and outdated. In today’s day and age of the internet, an online trading account lets you take your investments into your own hands. You can use this account to invest and carry out trades you like.
However, you will have to approach a broker to open an offline trading account. You will have to fill out a form and submit a few documents. Then, if you ever choose to trade, you’d have to contact your broker to make a trader on your behalf.
You can open an online trading account with the help of any stockbroker who provides online trading services or a mobile application. You can complete this process by sitting at your home comfortably. You can also make your own trading decisions, buying and selling stocks whenever you wish to. It lets you trade instantaneously, taking investment matters into your own hands.
Importance of a Trading Account
A trading account is essential to carry out trades in the stock market. It helps you buy and sell shares on the share market. With its help, you can make trade decisions taking you one step closer to financial freedom. A trading account can help you impose limits on your trading activity, ensuring you drive yourself to the ground by trading everything. It helps carry out trades quickly, maximizing profits. With the help of your trading account, you can place buy or sell orders, even outside of trading hours. Finally, it helps gauge your position and gain insights into your trades by providing the complete history.
Types of Trading accounts
In India, there are more than 3.6 crore investors who invest in the stock market. Even though trading is absolutely necessary, it’s not that well known compared to a Demat account. There are various types of Demat accounts investors use to invest in different things. They are
Equity Trading Account
An equity trading account helps you trade in shares, future, and options. trading in currency derivatives is also possible with the help of an equity trading account. The major drawback is that one can not subscribe to an Initial Public Offering (IPO). For an IPO, a Demat account is required as there’s no transaction that occurs and the shares are directly delivered to the investor.
Commodity Trading Account
The commodity market is similar to the stock markets yet completely different. You need a commodity trading Account to invest in the commodities market. To invest in the commodities market you need a broker who provides a commodity trading account and is a registered commodity broker in India. The commodities exchanges in India that you can invest in are The Multi Commodity Exchange (MCX) and the National Commodities and Derivatives Exchange (NCDEX).
Offline & Online Trading Accounts
A trader not well versed with technology can opt to physically visit a broker and place a buy or sell order. It’s a hectic process as the internet has made trading pretty convenient.
For an online trading account service, a trader can place an order over the phone and it can be carried out by trading software or a mobile app. This makes trading very difficult for those who find it challenging to carry out trading on their own.
2 in 1 Trading account
Few brokers in India provide a 2-1 service where the Demat account and trading account are integrated. This helps investors invest in stock, futures, options, and even for IPOs. This ensures smooth transfer of securities.
3 in 1 Trading Account
3 in 1 account, have a bank account integrated with your Demat and trading account. This provided a seamless trading experience as funds are directly credited and debited from your bank account. Shares too are deposited and withdrawn from your Demat account without much effort on a successful trade.
Discount Broking Account
A discount broking trading account is a normal broking account that only lets you trade in the stock market. There are no additional features like offline trading, research services, financial advice, etc. The only upside or benefit is that it provides discounts on brokerage and has low operating costs.
Full-Service Trading Account
This trading account has various features that can be beneficial for a trader. A Full-Service trading account provides additional services like detailed reports. Some also might help you with a personalized financial advisor, ensuring you get assistance based on your financial goals. They provide complete information by researching the market and giving better trading decisions for you.
How Does a Trading Account Work?
Not only does a trading account help in carrying out trades, but it also links your bank and Demat account. The money in your bank account is used by your trading account to buy shares. After successfully purchasing a share, it gets deposited into your Demat account for storage. If you choose to sell a share stored in your Demat account, you’ll have to place a sell order through your Demat account. Once sold, the money is transferred to your bank account. Hence a trading account plays a crucial role in helping you invest your money and sell shares as and when required.
Advantages of a Trading Account?
A trading account is beneficial. Here are a few advantages of having a Demat account.
With the help of your trading account, you can trade easily in the stock market.
It provides information to know gross profit and sales, which helps measure a profitable position.
It also provides the ratio between the cost of the goods sold and gross profit.
It also provides information about the efficiency of your trading activities.
It provides information on all stocks like their current price.
You can use the information provided by the trading account to compare the cost of goods sold and gross profit.
Some Differences between the Trading account and Demat account:
A Demat account stands for a Dematerialized account that helps store shares and other securities, while a trading account is used to buy and sell securities.
You can also leave it empty without any repercussions. Your trading account, on the other hand, uses funds from your bank account to purchase securities that are stored in the Demat account. It is also used to sell securities depositing the funds to a linked bank account. Your Demat account is forgery-proof, providing you with the option to freeze your account to safeguard your Securities.
On the other hand, a trading account lets you monitor how the market behaves. It also provides complete information on all the transactions you have carried out. You can convert physical shares into Dematerialized forms and vice versa with the help of your Demat account. On the other hand, you can easily use your trading account to trade on stock exchanges. You can trade from the comfort of your home or on the go. With the help of your Demat account, you receive dividends and other benefits like stock split and bonus shares. Your trading account provides access to all stock exchanges in the country.
Eligibility Criteria to Open a Trading Account Online
You can open a trading account with a stockbroker registered with India’s Securities and Exchange Board (SEBI). There are just two criteria that one needs to follow to open a Demat account:
You have to be an Indian citizen residing in India to trade and open a trading account online in India. A Non-Resident Indian can also invest in the Indian stock market, but they have additional requirements to fulfill.
To open and operate a trading account, you must be 18 years of age. If you are under 18, you can open a trading account with the help of your parents or legal guardian. They would also be responsible for carrying out trades on your behalf from your trading account.
Documents Required for a Trading Account
There are multiple documents that you need to open a trading account:
Your Permanent Account Number (PAN) acts as an identification and is compulsorily required to open a trading account. You can’t open a Demat account without the help of your PAN card.
Your Aadhaar card can be used as an address proof. Apart from your Aadhaar card, you can also use your passport, driving license, Ration card, Voter-id, utility bills, bank account statements, etc., as address proof.
You have to provide income proof to open a trading account. You can provide six months bank statements, 3-month salary slips, Income Tax Returns (ITR) statement, Demat account statement, holding report, net-worth certificate, etc. as income proof.
Your trading account is linked to your bank account to use funds for trading. For this very purpose, you have to link your bank account by providing a canceled cheque, passbook, or bank account statement of the last six months.
Photograph and Signature
You have to provide a passport size photo and also sign a document. If you’re opening a trading account online, you will have to sign on a blank white paper and upload it.
How to Open Trading Account
Opening an online trading account has become an easy and quick process. A few steps are involved if one correctly can help you begin your trading journey within two to three days. The whole process can be completed conveniently from the comfort of your home via a desktop or a mobile device. The steps to open a trading account are
Choosing the right brokerage firm for you is crucial. Based on your needs, having the right stockbroker is important. It can make a huge difference based on the services provided by the stockbroker.
To make it easier for you to find the right broker, one must compare the brokerage. Discount brokers provide fewer services but provide significant discounts on the trades you carry out. One can compare account maintenance changes too. Another factor of comparison is if they provide 2 in 1 or 3 in 1 account service.
After making a decision you will have to either visit the broker, go to their website or download the mobile application.
After this all you need to do is fill up the account opening form.
Upon filling up the form you need to complete the Know Your Customer (KYC) requirements. Apart from KYC, you have also submitted the required documents to prove your identity and address.
Once you do your part your application is then verified to ensure your personal details are correct. If you’ve provided all details online then there could be an in-person verification.
Once verified your trading account will be created and you will get the details via email.
Based on this you can buy and sell shares on the stock market.
This article, “What is a trading account?” covers all the crucial points in detail. Hope you found this article helpful in understanding the trading account entirely.
Frequently Asked Questions
A trading account is used for trading in the Indian stock market. It is used to trade various securities from the comfort of your home without the involvement of a broker influencing you. Without a trading account, you cannot trade or make any kind of transaction in the share market.
A trading account is necessary to carry out the Indian stock market trades.
Different stockbrokers provide different services. Based on the services, you must choose the right stock broker for you. If you’re a veteran trader and know-how to carry out trading independently, a discount broker is the right fit for you. If you’re new and trying to understand the stock market then you might opt for a full-service broker.
A full-service broker provides services like in-depth research, portfolio review, stock advice, etc. They can also assign a portfolio manager to help you out personally based on your goals. A discount broker helps you out by providing a discount on the brokerage fees compared to a full-service broker. They may or may not offer additional services. Understanding your needs and choosing the right broker is essential.