Discussion Topic: How to Start Trading
Today we are going to answer the most basic question What is a Trading account? What is Demat Account? How to start trading stocks in India? How the trading and demat account works? and most importantly, how to open a demat account and start trading in stock market?
This Article is most relevant to India and Indian subcontinent. If you are visiting this article from Tier1 countries like USA/UK/CAN/AUS etc, then follow this link: What Is a Brokerage Account? How to Open One?.
The Basics to Start Trading Stocks:
Majority of the stocks trading in the Indian stock market takes place on two stock exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
The BSE is the oldest stock exchange operating since 1875 and the NSE started trading in 1994. There are 7,000 + stocks listed on the BSE and 5,000 + stocks are listed in NSE. However, it has been observed that only 3,000 of these stocks are actively traded.
How to Start Trading Stocks in India?
To start trading stocks in the Indian stock market, you need 3 types of accounts – A Trading Account (to place buy/sell orders), A Demat Account (to hold your shares in dematerialized/electronic form), and A Bank Account (for fund transfers).
You first need to open a Trading Account and Demat Account through any of the stockbrokers. You need the bank account for transferring funds to and from your trading account. The above image shows how the trading is done and how the money flows.
As you all know how to open a bank account [else google it, lots of guides available], we would not be discussing about bank accounts. We would discuss and learn about trading account and demat accounts.
What is a Trading Account in Stock Trading?
A Trading Account is very similar to a bank’s current account, but it must be opened with a "registered stock broker". This is the first step towards starting up the stock trading.
This account is used to place buy/sell orders on the stock exchange. You may use your trading account for both the online and offline stock trading depending on your broker.
To buy or sell stocks (shares) through a trading account, you must first transfer funds to your trading account from your bank account. Then you can use that trading account for directly buy/sell shares for the amount you have in the trading account.
Later if you want your profit back, you can also withdraw available funds from trading account to bank account.
What is a Demat Account in Stock Trading?
A Demat Account is very similar to a bank's Savings Account, but instead used for holding stocks or shares for more than one trading day (i.e. - overnight). This is the most vital account for stock trading.
In Demat Account, shares are held in a dematerialized or electronic form, instead of issuing physical certificates to Investors.
You require the demat account in order to receive/transfer shares (delivery of shares) when you buy/sell shares through your trading account.
See our guide explaining the difference between Demat Account and Trading Account.
Opening a Demat Account and Trading Account:
In order to start trading stocks in India, you must first register yourself with a stockbroker. Once done, the stockbroker they will guide you through on the opening of a trading account, demat account, and linking of your bank account.
The process is very easy and generally done in the backend by stock brokers. You don't have to worry about all these backend processes.
In India, the government has mandated two institutions for opening a demat account with, The National Securities Depository (“NSDL”) and The Central Depository Services (India) (“CDSL”). They act as the custodian of your dematerialized or electronic securities.
Most of the reputed stock brokers register themselves as a Depository Participant (“DP”) and act as an agent under one of those above-mentioned depositories to provide quicker services available to the traders or investors. Effectively both of your trading account and demat account is maintained by your stockbroker (mostly through acting as 2 different entities).
Some smaller/new stockbrokers use the depository services from any other larger financial institutions and only provide the front end trading account.
As an investor, you don't need to worry about this, as this is processed solely in the backend by the broker. It takes an equal amount of time for shares to be deposited and withdrawn from the demat account in either case.
[Note: These days, most commercial banks started to provide a 3-in-1 account which combines a Trading, Demat, and Bank savings account. This is hassle-free and easier to open, but these banks usually have higher brokerage charges which lower your profit.]
How to Open A Trading Account and Demat Account?
To open a trading account or to Open a demat account, you must follow the below described process and must submit adequite proof documents:
- Contact an NSE and BSE registered stockbroker.
- Fill up the KYC form provided by the stockbroker. [Brokers would help you]
- Provide the required KYC documents - (i) identity proof, (ii) address proof, and (iii) PAN Card.
- Produce the original KYC documents to the authorized agent during account opening.
- For trading in derivatives segment (i.e. futures and options), 6 months account statement of your existing active bank account is required.
- Attach one canceled cheque of your bank account you want to link to your trading account.
- 3 copies of passport size photographs (requires 2 copies if you don't want to trade in currency derivatives).
How Many Trading or Demat Accounts I Can Open?
There's no limit to the number of trading and demat accounts you are allowed to open. In reality, you may have as many, or as few, demat and trading accounts as you like and as brokers will allow you to open.
You may have multiple demat and trading accounts with different brokers for diversifying your relationships and exposures while trading stocks.
Check Before Opening a Demat Account and Trading Account:
Below are some of the features, that you must check before opening a demat account/trading account with the stockbroker.
Account Opening Charges: This is the fee charged at the time of opening demat and trading account.
Account Maintenance Charges: This is an annual fee levied to maintain the demat account and trading account.
Brokerage Charges for Intraday Trading: If you take a position (buy/sell) on a stock and release that position (sell/buy) before the end of that day’s trading session, it is accounted as intraday trading. The brokerage charges for intraday transactions are very nominal, but depending on broker it varies between 0.01%-0.05% on the total transaction value.
Brokerage Charges for Stock Delivery: If you buy a share and hold it beyond that trading session (i.e. for more than one day), the transaction qualifies as a delivery based transaction. Normally the brokerage charges are higher in this case, usually between 0.08%-0.55% on the total transaction value. But some online discount brokers offer 0 (zero) fees as stocks delivery charges.
Brokerage Charges for Futures and Options Trading: Depending on the broker, the brokerage fees for future segment varies between 0.02% - 0.05% on the total transaction value and Rs 10 - Rs 100 per lot for options contracts.
Trading Platform: Consider and evaluate the software/ technology provided by the stock broker for online trading. Also, check if the stockbroker has a good service standard for the call-and-trade facility (for placing orders over the phone).
See our detailed guide on how you can select the best stock broker to start trading?
We hope that you have enjoyed the above article about how to start trading stocks in India. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts on how to start stock trading or about opening demat/trading account. Also, let us know about the service quality you are experiencing with your broker.