Trading Account

All about Demat and Trading Account: All you need to know

WHAT IS A TRADING ACCOUNT?

When a company lists on the stock market, its shares become available for trading on the stock exchange. Earlier, the exchange had an open-outcry system. In the mid-90s, the stock exchanges adopted the electronic system. This means, all trades were conducted electronically. Simply put, you didn’t have to go to the counter and place an order physically. You could do it through a computer, which would verify the details, the market price, and process the trade.

For this reason, you need a special account through which you can conduct transactions. This is called the trading account. Without one, you cannot trade in the stock markets. You register for an online trading account with a stock broker or a firm. Each account comes with a unique trading ID, which is used for conducting transactions.

WHAT IS THE DIFFERENCE BETWEEN DEMAT AND TRADING ACCOUNTS?

Yes. A trading account is used to place buy or sell orders in the stock market. The demat account is used as a bank where shares bought are deposited in, and where shares sold are taken from. Trading account with Kotak Securities helps you trade seamlessly in the stock market.

Let’s use an example.

You have Rs.100 in your wallet. You go to a shop and tell the seller that you want a packet of chips, you check the price, and finalize the transaction. Then, you take the money out of your wallet and give it to the seller. In this case, the wallet acts as the demat account, while you act as the trading account.

HOW TO OPEN AN ONLINE TRADING ACCOUNT?

Just like the demat account, a trading account is a must for investing in the stock market. This is because to trade in the stock markets, you need to be registered with the stock exchange. Stock brokers are registered members of the exchanges. They traditionally conduct trades on your behalf.

Most often, stock broking firms have thousands of clients. It is not feasible to take physical orders from every client on time. So, to make this process seamless, it is advisable to open an online trading account. Using this trading account, you can place buy or sell orders either online or phone, which will automatically be directed to the exchange through the stock broker.

Select Broker or Firm.
Compare brokerage rates and services provided
Get in touch with selected broker for account opening.
Fill account opening and KYC forms. Submit along with proofs of Identity & address.
Application verification process.
Get trading account details.
Place buy/sell order.

HERE’S HOW YOU OPEN A TRADING ACCOUNT:

First, select the stock broker or firm. Ensure that the broker is good and will take your orders in a timely manner. Remember, time is of utmost importance in the stock market. Even a few minutes can change the market price of the stock. For this reason, ensure that you select a good broker.
Compare brokerage rates. Every broker charges you a certain fee for processing your orders. Some may charge more, some less.
Some give discounts on the basis of the amount of trades conducted. Take all this into account before opening an account. However, remember that it is not necessary to choose a broker who charges the lowest fees. Good quality brokerage services provided often may need higher-than-average charges.
Next, get in touch with the brokerage firm or broker and enquire about the account opening procedure. Often, the firm would send a representative to your house with the account opening form and the Know Your Client (KYC) form
Fill these two forms up. Submit along with two documents that serve as proof of your identity and address.
Your application will be verified either through an in-person check or on the phone, where you will be asked to divulge your personal details.
Once processed, you will be given your trading accounts details. Congrats, you will now be able to conduct trades in the stock market

HOW TO TRADE USING DEMAT ACCOUNT?

STEP 1:- Link your trading and demat accounts. This way you won’t have to keep supplying your demat account details for every transaction.
STEP 3:- The exchange will process your order. It will verify the details of the transaction, the market price, the availability of the shares in the market, and so on. It will also check the details of your demat account that is linked to your trading account. This is especially so in case of a sell order.
STEP 2:- Place an order through your online trading account. This could be a market order, a limit or buy order, or an after-market order. If your brokerage allows you to place orders through the phone, then you will need to supply your trading account details.
STEP 4:- Once the order is processed, the shares will be either deposited in or debited from your demat account.

CAN YOU TRANSFER SHARES USING DEMAT ACCOUNT?

Nomination: Yes, nomination is possible. You can have a nominee of your choice by filling up the details in the account opening form. This enables the nominee to receive the securities after the death of the holder of the demat account.

Between DPs: Transfer of shares is possible between demat accounts held with different DPs. You need to fill the Delivery Instruction Slip Book (DIS) and submit the same to your DP for transferring your shares from another demat account. However, you need to check whether the central depositories are same or not (CDSL or NSDL). If both of them are different, then you need an INTER-Depository Instruction Slip (Inter DIS). If they are same, then you need an INTRA Depository Instruction Slip (Intra DIS).

Do try to submit that DIS when the market is on. Then, the date of submission of DIS and date of execution of DIS would be the same. Otherwise, there may be a delay. You may also need to pay the broker some charges for the transfer.

Congrats, now you know about the requisites for trading – demat and trading accounts.

Traps of Trading Account

A trading account is essential for buying and selling securities in the stock market. While it provides access to the markets, there are several traps and pitfalls that can lead to unnecessary costs, risks, and complications if you’re not careful. Below are some common traps associated with trading accounts:

1. High Brokerage Fees:

Trap: Some brokers charge high brokerage fees on trades, which can significantly reduce your profit margin, especially if you are a frequent trader.
Solution: Compare brokerage charges across different platforms. Many brokers offer discount brokers with lower charges, or flat fee structures that can reduce your overall costs. Opt for brokers that align with your trading volume and frequency.

2. Hidden Charges and Fees:

Trap: In addition to brokerage fees, some trading accounts charge hidden fees, such as transaction fees, call and trade charges, annual maintenance fees, and custody charges for holding stocks.
Solution: Always carefully read the fee structure provided by the broker. Ensure there are no hidden charges that could eat into your profits. Choose brokers with transparent pricing.

3. Platform and Transaction Costs:

Trap: Some trading platforms charge fees for using their advanced trading tools, research reports, or for accessing certain market data.
Solution: Look for brokers that offer free access to trading platforms and research tools or those that charge a minimal fee. Make sure the costs are justifiable for your trading needs.

4. Account Maintenance Charges:

Trap: Many brokers impose annual maintenance charges (AMC) for maintaining a trading account, and these can sometimes be quite high, especially if your trading activity is low.
Solution: Choose a broker that offers no AMC or low maintenance fees, especially if you’re just starting or don’t plan to trade frequently.

5. Limited Customer Support:

Trap: Some trading platforms offer poor customer support, which can be problematic if you need assistance with technical issues, account problems, or urgent trades.
Solution: Research the quality of customer support before signing up. Look for brokers that offer 24/7 support and have a reputation for good service.

6. Margin Trading Risks:

Trap: Many brokers offer margin trading (borrowed money to trade), but if your trades go against you, you may incur heavy losses and be forced to repay borrowed funds, including interest and fees.
Solution: Use margin trading cautiously, and only if you understand the risks involved. Avoid excessive borrowing, and ensure you have enough capital to cover potential losses.

7. Inactivity Charges:

Trap: Some brokers charge an inactivity fee if you don’t place a trade for a certain period, typically a few months.
Solution: If you’re not planning to trade frequently, look for brokers with no inactivity fees or choose brokers that offer flexibility in maintaining your account.

8. Overtrading:

Trap: The ease of access to a trading account can lead to overtrading (executing too many trades), which increases transaction costs and can erode profits. Additionally, overtrading can result in poor decision-making and increased emotional stress.
Solution: Set a clear trading strategy, stick to it, and avoid impulsive decisions. Limit your trades to high-conviction ones rather than trying to capitalize on every market move.

9. Lack of Research or Knowledge:

Trap: Trading without sufficient knowledge or research can lead to poor decisions and significant financial losses. Some platforms may not offer adequate research tools, or may offer biased research to encourage more trading.
Solution: Use brokers that provide comprehensive research, educational resources, and tools for making informed decisions. Always do your own research before making trades, and consider paper trading (simulated trading) to gain experience before committing real money.

10. Confusing Terms and Conditions:

Trap: Trading accounts can have complicated terms and conditions, especially regarding margin policies, risk management, or penalties for certain actions like exceeding trading limits or failing to pay dues on time.
Solution: Always read the fine print and ensure you understand the terms and conditions of your trading account. Clarify any doubts with your broker before proceeding.

11. Poor Platform Experience:

Trap: Some trading platforms may be difficult to navigate or suffer from technical glitches, especially during periods of high market volatility, making it hard to place orders or manage your trades.
Solution: Choose brokers that offer a stable, user-friendly platform with a history of good performance. Test out the platform’s functionality before committing to it.

12. Unfavorable Tax Implications:

Trap: Profits earned from trading are subject to capital gains tax, and if you’re not aware of how taxes work, you could be left with a large tax bill at the end of the year.
Solution: Understand the tax implications of your trades, including short-term and long-term capital gains tax. Consider speaking with a tax advisor if you’re unsure how your trades will be taxed.

13. Forced Liquidation (In Margin Accounts):

Trap: If you trade on margin, and the value of your position falls significantly, the broker may initiate forced liquidation of your positions, locking in losses at unfavorable prices.
Solution: Be cautious with margin trading, and keep a close eye on your positions. Set stop-loss orders to limit potential losses and manage risk effectively.

14. Inadequate Risk Management Tools:

Trap: Some brokers may not offer risk management tools such as stop-loss orders or trailing stops, which help limit potential losses.
Solution: Choose brokers that provide comprehensive risk management tools to help protect your investments. Always set stop-loss or take-profit levels based on your risk tolerance.

15. Lack of Liquidity:

Trap: Certain stocks or securities may be difficult to trade due to low liquidity, resulting in wide bid-ask spreads, delays in executing orders, or even the inability to buy or sell at desired prices.
Solution: Focus on liquid stocks or markets with higher trading volumes, and avoid illiquid instruments that may expose you to unfavorable price movements.

16. Overlooking Account Type (Cash vs. Margin):

Trap: Trading accounts can be categorized into cash accounts and margin accounts. In a cash account, you can only trade with the funds you deposit, whereas in a margin account, you borrow money from the broker to trade. Some traders might inadvertently opt for margin accounts, exposing them to higher risks.
Solution: Be clear about the type of account that suits your needs and risk tolerance. If you’re new to trading, it may be wise to start with a cash account before venturing into margin trading.

Conclusion:

While trading accounts are crucial for investing in the stock market, they come with several traps that can negatively impact your financial performance if you aren’t careful. To avoid these pitfalls, it’s important to choose a reputable broker with transparent fees, a stable trading platform, and strong customer support. Always manage risk effectively by using stop-loss orders, avoiding overtrading, and being mindful of the tax implications. By staying informed and cautious, you can maximize the potential of your trading account while minimizing unnecessary costs and risks.

Key Terms:

Active trading
Brokerage accounts
Day trading
Equity trading
Forex trading
Investment accounts
Margin trading
Online trading
Securities accounts
Stock market accounts
Stock trading
Trading accounts
Trading commissions
Trading fees
Trading platform

Disclaimer: The information provided here has been compiled from various sources to the best of our knowledge. While every effort has been made to ensure the accuracy of the details, there may be occasional errors or omissions. If you find any discrepancies or incorrect information, kindly inform us so we can make the necessary corrections. Thank you for your understanding and cooperation.