Investing in the stock markets is no longer just the domain of professionals and high net worth individuals. Retail participation is growing at a rapid pace in recent years. There are over 3.6 crore stock market investors in the country. To invest in the stock market, one needs a demat account and a trading account. The demat account is well-known, but what is a trading account?
The demat account is provided by the depositories and it is used to hold the shares that are bought by the investors. But a demat account cannot help in buying and selling of the shares, you will need a trading account for that. A trading account is essentially an interface between the investor and the demat account.
Trading account is an investment account that holds financial assets like equity and derivatives but differs substantially from other investment accounts. The major points of difference are the frequency of trades, the purpose of trades and the risk involved. With a trading account, you can buy and sell financial assets like stocks without any restrictions. Trading account facilitates the buying and selling of stocks and other assets within a day. If you want to buy or sell a stock, you will mandatorily need a trading account.
Before the introduction of shares in the dematerialised form, traders used to convey their orders verbally or through gestures. Traders used to be physically present at the stock exchanges and the arrangement was known as the open outcry system. After the arrival of dematerialised shares, you just have to place the order through a trading account and the brokerage electronically places the order on behalf of the investor. There are various kinds of trading accounts in India.
Equity trading account: With an equity trading account, you can trade in stocks, futures and options. The equity trading account is not enough to take delivery of the stocks or to subscribe to an initial public offering. If you decide to take delivery of shares, you will need a demat account to store them. But if you trade only in futures and options, a trading account is sufficient as no delivery is involved in futures and options.
Commodity trading account: The commodity trade is a big part of the overall market, but you will require a separate trading account for commodity trading. Even though commodity trading is as simple as trading in equities, separate trading accounts are a result of a different era. Earlier, the regulatory body for commodities and equities were different, but a few years ago the commodity trade was brought under the regulation of the SEBI. Even though the regulator is the same now, the practice of separate trading accounts is continuing.
Online and offline trading accounts: Don’t get confused by the name, offline trading account doesn’t mean the physical presence of the trader at the exchange or the broker’s office. Offline trading accounts don’t provide the facility of online trading through a desktop or mobile application. One has to call a broker and place orders in the case of offline trading accounts. As the name suggests, online trading accounts provide the facility of trading through an application, which uses the internet to relay the information to the brokerage.
2-in-1 account and 3-in-1 account: To trade in the stock markets, you require three types of accounts—trading account, bank account and a demat account. You will have to transfer money from your bank account into the trading account. Then you can use the money to buy shares through the trading account that will be held in the demat account. Some brokerages offer a 2-in-1 account that has an integrated trading and demat account and it makes the buying/selling and the transfer of shares to the demat account seamless. The 3-in-1 account goes a step further and offers an integrated demat, trading and bank account. A 3-in-1 account facilitates seamless transfer of money as well as shares. Generally, banks with brokerage operations offer 3-in-1 accounts.
Discount and full-service trading accounts: Discount trading accounts have become popular in recent times. They offer plain vanilla trading services without any value-added services. On the other hand, full-service trading accounts offer research reports, stock suggestions and many other facilities with trading services.
A trading account is essentially compulsory for participating in the stock markets. A credible brokerage should be chosen for the trading account as frequent glitches could lead to significant losses for the investor.