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The advent of digital technologies has transformed everything around us including our investments. In this digital age, it is essential to have a Demat account for holding securities. However, your Demat account does not allow you to transact with them. To buy or sell securities you have to open a trading account.

Let’s have a look at the working of a trading account and the benefits of having it:

What is a Trading Account?

A trading account is an investment account for transacting in securities. You can buy or sell assets frequently through your trading account. It helps you speculate trades by monitoring the movements of your assets. It is an essential tool to seamlessly invest in stock markets while making the process convenient and secure.

Previously, the open outcry system involving hand signals and verbal communication was used for trading in the stock markets. Traders had to convey their buying or selling decisions through this system. Upon adoption of electronic systems in the stock markets the open outcry system became obsolete. Buying or selling through the online method requires a trading account. Now, traders do not place orders through physical methods. You may not be present at the stock exchange to complete the transactions. Instead, you can open a trading account with a registered stock market broker and authorize them to conduct trading on your behalf.

Your trading account acts as an investment account to holds your securities and other holdings. You can use it to buy and sell assets frequently even within the same trading session. To activate your online trading account, you must register with a stockbroker or a brokerage firm. The broker will issue a unique trading ID for conducting stock market transactions. Different trading accounts come with varied features so you must choose one that meets your trading and investment requirements.

How Does a Trading Account Work?

A trading account links the Demat account and the bank account of an investor. You can place an order to buy shares through your trading account. Your transaction goes for processing in the stock exchange. Upon execution, the allotted number of shares is credited into your Demat account. The proportionate sum payable gets deducted from your bank account.

When you place an order to sell equity shares the process is reversed. You place a sale order for a fixed number of shares from your trading account. The transaction is submitted for processing in the relevant stock exchange. Once the order is executed, the selected number of shares is debited from your Demat account. A proportionate amount gets credited to your bank account.

Types of Trading Accounts

You can select from the following two types of trading accounts

  • A securities/standard trading account: A Standard trading account covers all your basic investment requirements. It allows you to trade equity – both intraday and delivery, futures & options (F&O), exchange traded funds (ETFs), mutual funds, and currency futures. Short-term traders can leverage a standard trading account to invest their funds at a high frequency.
  • A commodity trading account: You will need a Commodity Trading Account if you plan to trade in commodities such as gold, silver, copper, and crude oil. You must open an account with a commodities broker for this process. A commodities broker is an individual broker or a brokerage firm. They are a trading member of a recognized commodity exchange such as NCDEX or MCX. You can trade commodity futures with your commodity trading account. Therefore, you do not need to link it to your Demat account.

However, an important point to note is that you can open only one trading account with a broker. So, if you need multiple trading accounts you must open them with different brokers.

Advantages of Opening a Trading Account

One-point Access

A trading account eases the wealth creation processes for you by bringing all your investments on a single platform. You get access to multiple exchanges in India and can trade in different securities and commodities. The leading exchanges included in most trading accounts are National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE) for securities. While for commodities there are National Commodity and Derivatives Exchange (NCDEX), and Multi Commodity Exchange (MCX). Your online trading account enables access to all these exchanges in just a click.

Reliable information

Taking the right decision at the right time helps you make the most out of your equity investments. When you open an online trading account the concerned platforms extend some value-added services. These include sharing research reports prepared by experienced and knowledgeable professionals. You can study these reports and make informed investment decisions. This improves your probability of earning higher returns.

Notifications and customization

Most online trading platforms provide customized support to their clients round the clock. You can easily connect with their knowledgeable team for troubleshooting a technical issue or guidance related to the trading platform. Additionally, you can allow them to send push notifications according to your investment priorities. They also alert you through SMS or emails about the buy and sell targets if you opt for the notifications.

Flexibility

After trading platforms have become app-based, it has become easy to access them with the help of laptops, smartphones, and other hand-held devices. Online trading offers the flexibility to keep track of investments from anywhere and at any point in time.

Seamless Transactions

Online trading allows you to seamlessly transfer funds for conducting equity trading. It reduces your effort of being physically present at the exchange to lock a transaction. A trading account helps you save and invest conveniently.

How to Open a Trading Account?

A trading account along with a Demat account is necessary to invest in securities.

You can go through the following steps to open a trading account online:

1. Firstly, you must select a broker as per your investment requirements. Ensure the broker responds to your demands within specified timelines. Time is crucial when dealing with the stock market. The platform must have a smooth and intuitive user interface to ease the process for you and save time.

2. Secondly, you should understand and compare the brokerage rates. Each broker or brokerage firm has different charges called a processing fee. You must ask for details about their account opening procedure and charges before finalizing a broker.

3. Thirdly, you will be required to fill a Demat account opening form and Know Your Client (KYC) form either online or offline.

4. Fourthly, the data entered in your forms will be verified on the phone or through an in-person check.

5. Fifthly, upon completion of all the documentation procedures you are provided the details of your trading account. Now, you are all set to conduct trades in the stock market.

What are the Documents Required To Open a Trading Account in India?

The trading account opening procedure and documents required are similar across all brokerage firms. You must provide the following documents for opening a trading account:

Proof of Income:

You may submit any one of these documents as proof of income:

  • Copy of your Income Tax Return (ITR) Acknowledgement slip.
  • Certificate of Net Worth or copy of the annual statement of accounts authenticated by a Chartered Accountant.
  • Salary Slip of the current month or your Form 16.
  • Latest statement of your bank account containing your income history of the last 6 months.
  • Self-declaration to prove ownership of assets.

Proof of Identity:

You may submit any one of these documents as proof of identity:

  • PAN card with a valid photograph.
  • Government-issued ID such as Aadhaar card / Voter ID card / driving license/ Passport.
  • Identity card with applicant’s photo which is issued by Central/State Government or its Departments. Similar ID issued by Statutory/ Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions. You can also submit identity cards issued by University affiliated Colleges and Professional Bodies such as ICAI, ICWAI, or ICSI Credit/ Debit cards with your photograph issued by Banks.

Proof of Address:

Any one of these documents can be submitted as proof of address:

  • Passport/ Voters Identity Card/ Ration Card/ Registered Lease or Sale Agreement of Residence/ Driving License/ Flat Maintenance bill/ Insurance Copy.
  • Utility bills like landline telephone bill, electricity/ gas bill which is not more than 3 months old.
  • Bank Passbook which is not more than 3 months old.
  • Self-declaration of a new address attested by judges of the High Court and Supreme Court.
  • Address proof issued by bank managers of Scheduled Commercial Banks/ Scheduled Co-Operative Bank/ Multinational Foreign Banks, Gazetted Officer / Notary public, Member of Legislative Assembly, Member of Parliament.
  • Identity card containing address issued by Central/ State Government and its Departments. ID issued by Statutory/ Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions. IDs issued by University affiliated Colleges, Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council.
  • Any of the above address proof in the name of your spouse.

What is a Demat Account?

A Demat account is also referred to as Dematerialized account. It is an account for converting or Dematerializing your physical shares in electronic format. All Demat accounts in India are maintained by National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

The account holds all your shares and securities of publicly traded companies. You can also hold a wide variety of other investments such as bonds, mutual funds, and ETFs in this account. Similar to a bank account, your Demat account will be credited or debited each time you buy or sell shares. Having a Demat account eliminates unnecessary paperwork and streamlines your process of share trading.

What is the Difference Between a Demat Account and a Trading Account?

The following are the main differences between a Demat and a Trading Account:

Functionality

Each account performs specific functions to assist you in wealth creation. A trading account is useful for buying and selling securities. The shares get credited or debited to your Demat account.

A Demat account, on the other hand, also allows you to keep all your financial instruments in an electronic format. You must change your physical format securities into electronic form. Though you can convert them back to physical form as well.

Nature

A trading account functions similar to a current bank account. It links your Demat account to your bank account. It withdraws shares from your Demat account when you sell them or adds to it when you buy them.

Your Demat account stores all the shares and securities that you have bought from the market. Unlike a trading account, it works like a saving account.

Role

Both accounts play a crucial role for traders in the share markets. You need a trading account to buy or sell the shares of any company. The debit or credit of money takes place with your bank account. But the increase or decrease of shares is reflected in your Demat account.

Annual charges

A trading account is generally free to maintain, though it depends on the broker. However, there may be a processing fee on a per transaction basis.

Investors must pay an annual charge for holding a Demat account.

Is the Trading Account a Nominal Account?

Yes, the trading account is a nominal account. It shows both debit and credit transactions in a financial year. In other words, it records all the sale prices, cost prices, and other related expenses. It helps in determining the gross profit gains or losses. Using this account, the balance sheet is prepared at the end of the accounting year. Trading accounts is the first step in preparing final accounts. It has two columns, Debit (Dr.) and Credit (Cr.).

Following are the items in a trading account:

  1. Opening stock : Opening stock is the carry forward of the unsold stock from the previous accounting period. It consists of raw materials, work-in-progress inventory, and finished goods.
  2. Purchase and purchase returns : Goods and services bought for business purposes are purchases. The goods may be purchased in cash or credit. Also, in instances when the goods are returned to the supplier, it becomes part of returns outward or purchases returns.
  3. Direct expenses : Expenses incurred for performing the business activities are called direct expenses. In other words, these are expenses incurred to the core business operations.
  4. Sales and sales returns : Goods that a business sells in cash or credit fall under the head ‘Sales’. Items sold to customers may be returned for various reasons, such returns are called returns inwards or sales returns.
  5. Closing stock : The unsold stock or inventory in hand at the end of the accounting period is recorded under the closing stock. It is valued at cost or net realized value whichever is lower.
  6. Gross profit or gross loss : After all the items in the trading account are arranged. The trading account must be balanced to determine profit or loss.

Is Online Trading Safe?

Online trading enables an investor to buy and sell financial securities through an online trading account via the internet. Through online trading, one can place orders and cancel them at the comfort of their home. Online trading is convenient, cheaper, faster, and eliminates the middlemen. It also gives investors greater control of their money and a better understanding of their investments. Nothing is entirely safe in the world and like everything else online trading also has its pros and cons.

Online trading happens on the internet and can have few setbacks concerning online security. However, all brokerages ensure high security for all their customers. They have a section dedicated to explaining the measures they take to protect all confidential information. The transactions made through online brokerage platforms are made safe for customers by adhering to industry best practices.

However, as an investor, one can also take measures to ensure their safety. One has to ensure that the website they trade on is using high-end encryption. Encryption is a process that scrambles data so that only the intended user can use it.

Apart from that, one has to ensure that trading happens on their personal computer and not on a shared system or at any cyber café. Log out of the trading account after the trading activity is complete. All personal computers need to have anti-virus to be protected against any computer virus. Also, do not click on remember me while logging in through a shared PC. If a trader ensures that these safety measures are taken care of, then online trading can be as safe as offline trading.

Frequently Asked Questions

What is a free trading account?

Free trading accounts in India are zero brokerage trading accounts. These accounts do not charge any commission on any exchange or trading segment. They are used for all types of trading, including intra-day, delivery trading, and buy today sell tomorrow trading(BTST). You can use them to trade across equity, derivatives, currency, and commodity without paying any brokerage charges. 
However, these accounts make money through a fee for add-on services for an advanced trading platform, annual account maintenance fees, call, and trade, etc. These accounts best suit frequent traders. Also, these free accounts have the lowest breakeven point.