The Securities and Exchange Board of India (SEBI) has made it mandatory for investors to get a trading account along with a Demat and a savings account to participate in the stock market. It lets you buy and sell stocks, bonds, and other securities on the stock exchanges.
However, the working and use of a trading account are quite ambiguous to most new traders and investors. Are you wondering why a trading account is necessary for investing in the stock market? If yes, keep reading to understand the meaning and functions of a trading account.
What Is a Trading Account?
A trading account is another important account that you need to invest in the stock market. This account serves as a link between your savings and Demat account. The trading account provides the interface with which you can place an order to buy or sell stocks, bonds, ETFs (Exchange Traded Funds), etc.
You can register for a new trading account on the online platform of a stockbroker. Every trading account carries a unique ID, which you have to use for transactions.
To take part in the stock market, you will require three accounts- a savings account to transfer funds, a Demat account to store your securities and a trading account to buy and sell shares. It is using a trading account that carries out transactions.
Therefore, investors interested to earn from the stock market must necessarily have a trading account. They should also link their Demat and savings accounts with trading accounts to enable a convenient trading experience.
How to Use a Trading Account?
After creating a trading account, you must link it to your bank and Demat account to start trading. To purchase stocks, you can visit your stockbroker’s website and place an order to buy your preferred quantity of shares with a trading account. The stock exchange will receive your request and upon execution, it will allot you the requested number of shares. These shares are transferred to your Demat account and it holds them as securities.
It is important to note that stock exchanges follow the (T+2) rule, wherein you shall receive your purchased securities within 2 business days. After this, the securities will be credited to your Demat account. When you place a purchase order, an amount equivalent to the price of shares will be debited from your funds. You need to transfer these funds from your savings account.
Similarly, when you place a sell request from your trading account, the stock exchange will search for a corresponding buy request. Once it finds a match, your trade will be executed. Your trading account will transfer the required number of shares from your Demat account to the buyer’s account. At the same time, the amount will be credited to your trading account.
What Are the Features and Benefits of a Trading Account?
The following points highlight the features and benefits of a trading account.
- Customisable Trading Platforms
With a trading account, you can customize your watchlist, set alerts, get notifications, and modify orders at your convenience.
- Convenient Trading
You can enjoy an easy trading experience when you use a trading account as it lets you monitor stock movements online. You can also place buy and sell orders from the comfort of your home.
- Instant Transactions
Trading accounts offer quick transactions of money or securities from savings and Demat accounts respectively. Unlike traditional trading processes, you do not need to wait for days to receive your shares or the money.
- Value Added Services
Today, various Depository Participants (DPs) offer trading accounts with special services to assist your decision-making while investing in stocks. With such trading accounts, you can receive personalized insights on when to sell or purchase and level up your trading skills. However, this facility is not available with all trading accounts. You need to conduct thorough research before choosing a broker that offers the best services.
Here are two other noteworthy benefits of trading accounts that you must know.
- You may receive recommendations from experts to make the right choice while investing.
- You can also gain access to the After Market Order (AMO) facility to trade in the stock exchange conveniently. This reduces the chances of rash decision-making during market hours.
What Are the Types of Trading Accounts in India?
There are three types of trading accounts popularly in use. These are:
- Equity and Derivatives Trading Account
With an Equity trading account, you can manage all your basic stock investments. This account allows you to participate and earn from intra-day trading and trading of futures, options, and ETFs. This type of trading account is also known as a Standard or securities trading account.
- Margin Trading Account
With a Margin Trading account, investors can maximise their returns by using leverage, i.e., using borrowing funds from the stockbroker to take a larger position on a security.
Using this account, investors partially fund the trade and brokers place the remaining amount. The latter charges interest on this remaining amount, this is called Margin Trading Facility (MTF).
- Commodity Trading Account
You need a commodity trading account to trade with commodities like gold, silver, or coal in the commodity marketplace. To participate in this market segment, you must open a commodity trading account with your broker.
Steps to Open a Trading Account
The steps to open a trading account can vary from one stockbroker to another. Here are the basic steps to follow to open a trading account online.
Step 1: You need to start by choosing a stockbroker or bank as your depository participant. While doing so, consider the broker’s reputation, customer service quality, and brokerage charges.
Step 2: After choosing a broker, learn about the account opening process from its online portal.
Step 3: Follow the account opening process of your stockbroker and provide your basic details. These might include name, phone number, email address, and PAN details.
Step 5: Submit scanned copies of your required documents and wait for your stockbroker to conduct the verification process.
Step 6: Your stockbroker will conduct a KYC process in person or online. For in-person verification, you might have to visit the broker’s office to manually verify your details. Whereas, for the e-KYC process, you might need to record a video while reading your PAN details.
Step 7: Finally, after the broker completes the verification process, your trading account will be active. You will soon receive credentials like the DP ID and password to access and trade using your trading account.
This blog has stated all you need to know about using a trading account. You can easily open and use your trading account from your mobile or computer. To ensure that your trading account is safe from hacking and any type of misuse, consider keeping your credentials safe. For this, avoid logging into your account from random devices and sharing your passwords with anyone. Furthermore, ensure that your computer has antivirus protection to keep your confidential information safe.
Frequently Asked Questions
How is a trading account different from a Demat account?
The primary difference between a trading account and a Demat account lies in their function. A trading account enables an investor to purchase and sell securities in the stock exchange. On the other hand, a Demat account simply stores securities.
What is a free trading account?
Accounts that do not charge any additional charges or commission for any type of trading practices are free trading accounts. They earn their fees from add-on services that they provide and from Account Maintenance Charges (AMCs).
What are the components of a trading account window?
When you open your trading account you will generally see the following information displayed on the screen:
Opening stock price,
Closing stock prices
Is a trading account a nominal account?
Yes, a trading account is a nominal account as it displays both credit and debit transactions that you make.
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 7+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert.
He has previously worked for Khaitan & Co and Scripbox.