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The framework of stock market transactions has changed over time. From open outcry systems to trading electronically, the stock market world has gone through a revolution. Along with advancements, the stock market has also brought in some mandates to ensure standard approaches and fair trading practices to protect investors.
One of those mandatory requirements of trading in the stock market is to own a trading account. Let’s discuss in detail the meaning, features and importance of a trading account.
What is a trading account?
A trading account is a mandatory requirement for all stock market traders. It is a facility provided by stock brokers to traders and investors to enable the exchange of securities between two parties.
Since individuals do not have direct access to stock exchanges, they use the services of brokers who act as middlemen. However, brokers do not physically exchange cash and securities between two traders. Instead, they provide traders with a trading account linked to their bank and demat accounts.
Upon execution of a sell trade, shares get debited from the demat account, and cash gets credited to the bank account. To execute a buy trade, shares come into the demat account, and cash goes out of the bank account.
The basis of these transactions is the trade placed through the trading account. Once the order is placed on the trade date (T), the settlement in demat and bank accounts usually happens after T+2 days.
Types of trading accounts
Based on products:
- Equity trading account – This is specifically used for trading in stocks. Regular equity traders require demat accounts, too, for storing shares. Futures and options traders can do without demat accounts since such trades do not involve the actual transfer of securities.
- Commodity trading account – Traders must own separate trading accounts for trading in stocks and commodities. Since commodities were earlier under the supervision of the Forward Markets Commission and not under the Securities and Exchange Board of India, they required a separate account. The same system is in practice today despite commodities coming under the purview of SEBI.
Based on services offered by the broker:
- Offline trading accounts – Requires traders to connect with brokers using offline channels.
- Online trading accounts – Allows traders to place orders online using the broker’s online platform.
- Two-in-one – This is where brokers allow opening a demat and a trading account together.
- Three-in-one – This is where brokers give traders a combination of trading, bank and demat accounts.
- Discount trading accounts – Gives limited facilities to traders by allowing them to place orders only.
- Full-service trading accounts – Besides placing orders, these accounts give traders access to various reports, statistics, etc. It also gives them other facilities like insurance, mutual funds, etc.
Features and benefits of trading accounts
- Owning a trading account allows traders to enter stock market transactions.
- A trading account gives you the benefit of trading from the comfort of your home. It can be done electronically without hassles.
- Depending on the broker and the type of trading account, traders and investors get access to market data that helps in analysis and investment decisions.
- Tying up with a broker gives traders access to specialised knowledge. Brokers equip themselves with thorough market knowledge and they assist investors about the different investment opportunities.
How to open a trading account?
Investors must analyse a few important factors about the broker they will engage with, prior to opening the account:
- Check if the broker is registered with SEBI. Unregistered brokers invite legal consequences.
- Check the broker’s track record. Make sure you work with a credible and reliable broker.
- Check the different services the broker offers. Not every broker will provide all the different types of trading accounts. So, explicitly ask for the list of services covered.
- Understand the costs associated with operating a trading account. These charges impact your overall profit from stock market transactions.
Steps to open a trading account:
- Choose your broker and select the trading account type.
- Submit the necessary documents, such as ID proof, address proof, bank account details, etc.
- Allow the trader to verify your documents and conduct a background check.
- Once the verification is complete and satisfactory, the account will be active for trading.
Bottomline
Owning a trading account is the initial step to begin trading on the stock market. It is not just essential from a regulatory perspective but also from the varied benefits it offers to investors, including the ease of trading and providing them with relevant information to make accurate investment decisions
FAQs
A trading account is required by all those traders and investors who wish to buy or sell securities on stock exchanges and commodity exchanges.
A trading account is essential for placing an order, while a demat account helps in storing securities in electronic forms. Demat account comes into the picture after transactions are settled and when shares move from one account to another. Trading accounts are involved in the first step of placing a stock market order.
A demat account without a trading account does not serve the purpose. The objective of a demat account is to hold shares in a dematerialised form. But to do so, investors must buy shares for which a trading account is mandatory.
Yes, investors can have multiple trading and demat accounts, but not with the same broker. Trading accounts are linked to PAN, and SEBI restricts opening one account with one broker. Investors can, however, open multiple accounts with different brokers.
Yes, a minor can have a trading account. However, the account must be operated by the guardian until the minor attains 18 years of age.
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