Trading Account: Meaning, Need and Types

Thanks to the trading account facility, investing in stocks, commodities, and currencies is no longer limited to the experts or the wealthy. Retail investors like you, including young executives, housewives, retired people, and small businessmen, are showing an avid interest in stock and commodity trading activities. The growing interest in market investments is a result of enhanced awareness levels, digitisation replacing the need to physically hold and safely keep stocks, and the introduction of electronic trading.

If you have been thinking of trading stocks and commodities to earn phenomenal returns, it’s important to be aware of the risks too. To begin your trading journey, the first step is to open a Demat account and then a trading account. A Demat account keeps a record of the digital shares held by you, but it is not meant for the actual trading or to buy and sell stocks. For that, you will need to open a trading account in India. Let’s find out more about what is meant by a trading account and how to open one. 

What is a Trading Account?

The answer to this commonly asked question “What is a trading Account” is that it is an investment account that allows you to buy and sell financial assets without any restrictions. This trading account works as a link between the Demat account and the bank account. When an investor places an order for the purchase of shares, the transaction is sent to the respective stock exchange for processing. Once it is executed, the bought shares are credited into the investors’ Demat account while the proportionate amount of funds is deducted from the investor’s bank account.  Similarly, when a sale order is placed the requisite shares are removed from the Demat account and the sale amount is transferred to the bank account of the trader.

Online trading accounts have provided investors with greater flexibility in checking the status of their orders besides the ease of trading in stock markets from their smartphones and laptops.

Why Do I Need a Trading Account?

Now that you know the answer to “What is a trading account,” you need to understand the need for this account. Investors cannot directly trade in stocks in India. Instead, they have to carry out their trades through registered members. The trading accounts have replaced the traditional outcry system where the brokers bought and sold shares through hand actions or verbally.  In the new method, the buyers and the sellers of stocks do not have to be physically present in the stock exchange and instead can do so through a trading account with a registered stock broker. The actual trading is done by the brokers on the behalf of their clients. This means that anyone wanting to buy and sell securities or carry out trading activities has to open a trading account with a registered broker or member. The stockbrokers are trading members of an exchange and are well-versed in the functioning of the market and its rules.

They are experts in trading account work and can:

• Guide you and represent you in the market
• Buy and sell stocks on your behalf
• Educate you about the available investment options and provide correct information

These stockbrokers have hundreds and thousands of clients, so it is often not feasible for them to take physical orders from their clients. The share purchase and sale orders can be placed over the phone or online through the trading platforms or apps of the broker. The same is then directed to the stock exchanges.

How to Open a Trading Account?

Now that you are aware of what is meant by a trading account, you need to understand the process for opening it. A trading account in India should be opened with a Securities and Exchange Board of India or SEBI-registered member or broker and the process requires you to complete certain documentation requirements like filling out certain forms and uploading documents.  

 The process of opening a trading account involves:

1. Choose a Registered Broker - Choosing a SEBI registered stockbroker or a leading bank. You can finalise a broker after checking the features of their trading account, the facilities offered, and the reputation of the broker. Other features like the applicable charges can also be compared. You can check which brokers provide discounts on commission charges or brokerage rates and even compare the type of services being offered.
2. Choose a Broker Offering Trading on Both NSE and BSE - The Bombay Stock Exchange and the National Stock Exchange are the two primary exchanges where stocks are traded in India. But certain stocks are available on either one of these two exchanges. This means you should choose a brokerage that offers the option to trade on both these exchanges.
3. Check the Features of the Trading Account - When comparing the trading accounts of different brokers do check their features like brokerage charges, the convenience of placing orders, discounts offered on the higher number of trades, the type of account, the margin facility, and other features. Share trading accounts can also be differentiated based on the types of services offered by them. Many brokerage houses offer full-service trading accounts that include access to research reports, stock suggestions and many other facilities.
4. Fill the Account Opening and KYC Forms - Once you have zeroed in on the brokerage house with whom you wish to open a trading account, fill out the necessary forms. These forms require you to provide your details like your name and age, and contact details like your phone number and email id. You also need to provide details of your income and bank account and PAN number.
5. Upload the Necessary Documents - Once you have filled out the form you need to upload certain documents to prove your identity, address and income.
6. Complete the Verification Process - Once you have filled out the forms you need to perform an in-person verification to prove your identity
7. Sign the Documents - The next step is to e-sign the documents and upload them.
8. Submit the application

What is a KYC Form?

The KYC or Know Your Client application form is an agreement between the broker and the client and an essential step in the process of opening a trading account. The KYC formalities require you to provide all the necessary information related to your identity and the same is validated by the brokerage house before accepting you as a customer and opening your trading account. The KYC forms for individual investors and non-individual investors differ. 

The following is the list of documents that need to be submitted with your KYC form to the brokerage house:

1. Identify proof documents such as Aadhar, Passport, Voter ID, Driving License, PAN or any other photo identity.
2. Latest passport size photograph
3. Address Proof documents like Ration Cards, Passports, Voter ID Card, Driving License, Bank Passbook, Electricity Bill, or any other address proof document.
4. Photocopy of Your Pan Card.

 The broker will validate the form and the documents submitted by you and once that is done will provide you with the client code or the login details. This code needs to be provided for every buy and sell trade that is carried out on your behalf by the brokerage house.

Types of Trading Accounts in India

Another commonly asked question is “What type of account is a trading account? The answer to this question about what is trading account meaning is that it an account that allows you make transactions in securities, commodities and other investment instruments. Investors in India have the option of choosing from different trading accounts depending on their investment goals and objectives:

• Equity Trading Account - This trading account is primarily meant for buying and selling securities plus futures and options trading. The account can, however, be not used to subscribe to an Initial Public Offering or IPO or trade in commodities or take the delivery of stocks bought. Investors looking to take a delivery of stocks or subscribe to an IPO need to have a Demat account to store them. There is no need to open an additional Demat account if the investor wishes to invest in the futures or trade options.
• Commodity Trading Account - As the name suggests this account allows investors to trade in commodities like oil, metals, and coffee.
• Online and Offline Trading Accounts - Stock trading orders can be given offline through a phone or online from your mobile phone or laptop by using the internet. In the case of the offline accounts, investors need to call the broker and place orders for buying and selling securities but in the case of online trading accounts the orders can be placed through a trading app or platform downloaded on their laptops and mobiles.
• Two-in-One and Three-in-One Trading Accounts - Trading in stock markets requires investors to have a trading account, a bank account, and a Demat account.  This is because funds are needed to be transferred from bank accounts to trading accounts for the purchase of shares which are then held in the Demat account. Some brokerage houses offer a two-in-one account that includes both trading and Demat account while many banks with brokerage operations integrate Demat, trading, and bank accounts into one for the seamless transfer of money as well as shares.
• Discount and Full-Service Trading Accounts - Trading accounts can also be distinguished based on the services offered by them. Discount trading accounts offer only trading services with no value additions. Full-service trading accounts include access to research reports, stock suggestions, and many other services to aid investors to take wise trading decisions.
• All-in-One Accounts - The latest in the series of trading accounts is the all-in-one accounts that allow you to trade in stocks, commodities, mutual funds, Systematic Investment Plans or SIPs, Bonds, Gold Exchange Traded Funds or ETFs and even IPOs or Initial Public Offerings.

Features of an All-in-one Trading Account

The answer to what is a trading ac is that it an interface to trade in stocks besides being a bridge between an investor’s Demat and bank accounts. When you buy a certain number of shares, the payment amount is to be transferred from the bank account to the trading accounts. Similarly, when you sell certain shares the payment received is transferred from the trading account to the bank account. Brokerage companies offer different types of accounts to make your trading experience easier.  What is the meaning of trading account chosen by you will depend on its features and the instruments in which you can trade through it.  The all-in-one trading accounts make the whole process of investing simple and easy. You get a chance to invest in a variety of instruments including equity.

Some popular investment options for trading through an all-in-one trading account are:

• Equity - You get access to a range of convenient trading options in equity like the DIYSIP, e-margin, off- market Encash. These options provide you with financial flexibility by allowing you to buy now and pay later besides getting funds from the sale of stocks on the trading day itself as against the normal T plus 2 offered by many brokers.
• Initial Public Offerings - Now you can invest in the new equity issues by companies through your trading account. You can also make informed decisions by accessing analysis of forthcoming IPOs by experts.
• StockSIP - You can choose the disciplined way of investing by using your trading account to invest in a Systematic Investment Plan or SIP.  The StockSIP allows you to buy a pre-specified quantity of stocks at regular intervals over a specific period. This option can be used to invest in stocks, Gold ETFs, and Index Exchange Traded Funds or ETFs.
• Gold ETFs - You can also invest in a small denomination of the dematerialized form of Gold through your all-in-one trading account. Since Gold ETFs are listed and traded like stocks, this account allows you trade in them.
• Bonds/NCDs - The all-in-one trading account can also be used to invest in bonds and NCDs offering a higher rate of return.
• Mutual Funds - The all-in-one trading account can be used for investing in mutual fund units just like stocks.

Where to Open a Trading Account?

Now that you know what type of an account is trading account, you should look for a registered stockbroker who can ensure that your trading experience is smooth and seamless. Choosing an all-in-one account that links your bank, Demat, and trading accounts is a convenient and time-saving option. The Demat or the Dematerialised account reflects all your holdings at a particular time while the trading account is used to buy and sell stocks and other investments. Choosing the right stockbroker for opening your trading account is a must for a good trading experience.

Here are some considerations for choosing a good stockbroker:

1. Research - Before zeroing in on the stockbroker you wish to open an account with, do thorough research into the available options and talk to existing investors and check out their experiences. Check out the types of accounts being offered and their features besides the charges involves, the quality and efficiency of their trading platforms and apps.
2. Check Out the Reviews and Reputation of the Brokers - During your research check the background of the stockbrokers and their performance record. Customer reviews provide good insight into the services offered by a broker. Also, check customer views about the efficiency of the mobile app and trading platforms of the brokers.
3. Check Out the Brokerage and Other Key Charges - Stockbrokers facilitate buying and selling of securities and commodities by their clients, and in return they charge a certain commission called the brokerage charge. A full-service broker provides advisory services plus other premium facilities in addition to a trading platform. These brokers may charge a commission as a percentage of each trade executed from the trading account. In contrast, discount brokers provide only the trading facility and charge a flat fee per transaction. You should choose a full-service broker if you are looking for stock advisory and access to research reports but if you plan to invest on your own you can choose the discounted services broker.
4. Level and Type of Customer Services - The next consideration in your choice of a stockbroker is the level and type of customer services being offered. Investing through a trading platform or app may require some help for the newcomer investor. It is in these situations that technical support and customer services play an important role. Do check out the reviews and choose brokers that offer good customer service.
5. Type of Trading Platforms Being Offered - An important consideration in finalising your trading broker is to ensure that the trading platform being offered is simple to understand and has an easy user interface. You can check the reviews or the demo videos of the platform being offered before taking a decision. This is important because the trading platform is the place where you will buy and sell securities.
6. Quality of Advisory Services - If you are planning to rely on the advisory services of the broker for all your investments ensure that they are reliable. A stockbroker with a good reputation in advisory and research should be preferred over ones with not-so-good records.
7. Trading Options - Depending on the instruments in which you wish to invest choose a broker that offers a trading account and platform for them. If you are looking to invest in stocks as well as mutual funds and commodities and futures and options, choose a broker that offers services in multiple investments and trading instruments.
8. Check for Charges - A major cost associated with a trading account is the associated charges. Do ensure that the broker mentions all the charges clearly and there are no hidden charges that may pinch you later.
9. Educational Tools - Go for a stock brokerage that offers educational tools and resources for their clients. These tools will help you get acquainted with the process of trading and help you avoid common trading mistakes.
10. Easy Fund Transfer - Look for a stockbroker that provides an easy linking facility of your trading account with your bank account. Online and quick money transfers and withdrawals can make your trading experience smooth and efficient. But do check about the fees for such transfers.

These considerations will help you choose the best brokerage house for opening a trading account and starting your investment journey. In this process, do not get lured by hefty discounts and low commissions only. Instead, check the overall track record of the brokerage and the quality of services offered by it. The option to invest in multiple investments by opening a single trading account is quite lucrative and must be considered.