Basics of Stock Market 9: Three types of accounts you need in order to start trading in stock market
By now you should have a fair idea of how our stock prices fluctuate in a day. But in order for prices to fluctuate, you need some system where you have the company shares with you, with authorization. So, there should be some other medium that guides and keep an eye on all this. Let’s start by explaining the 3 types of accounts you require for trading, where these 3 accounts will keep an eye on what's happening and will also guide you throughout the process of purchasing/ selling the shares.
Table of contents
Everyone has a fair idea of this. This is the account that is linked to your bank. When you approach a bank to open an account, the first thing they do to open a savings account. If you are into a large business with daily transactions, you might open a current account. Whichever account may be, this particular account is tagged in your name. This saving account, a service offered by the bank allows you to store your money.
There isn’t any vault where banks store your money, all your money will be stored in an electronic format. The electronic money will be tagged into your savings account. If you want to put your physical money into your account-approach a bank. If you want to take out physical money from your account- approach a bank or ATM.
Nowadays, opening a savings account is mostly comes free of cost. And an added bonus is that you keep on getting interest on your money kept in your savings account. Cash in hand might tempt you to spend or might get stolen. Your bank guarantees the amount in your savings account as long as it sits there.
Opening a savings account is very easy. Since now, everything is done online, opening a savings account takes less than an hour’s work. You might need an additional government-issued ID card to give as proof of identity and residence. Now, you’re all set with your savings account. And remember, a savings account is what we need, and here which bank doesn’t matter. You can choose any bank you like according to your feasibility and interest.
One of the main reasons Bank is to be linked to your Demat account is to get dividends. Dividends are credited directly to the beneficiary owner's bank account through the ECS (Electronic Clearing Service). When the dividend is issued, the bank account number is mentioned on the dividend and warrant to avoid any fraudulent misuse.
Let’s go back to pre-1996 to understand what this account is. Before 1996, when you buy shares of a company, you will be getting a physical share certificate from the exchange which shows the following details:
Name of issuing Company
CIN no. (Corporate Identification Number) of such Company
Address of the company’s registered office
Name of owners of such shares
Folio Number of members
Number of shares which is represented by such share certificate
An amount that is paid on such shares
Distinct number of the shares
Share certificates are dispatched by the registered post to the share holder from the company. The local shareholders as per their preference can also collect the share certificates personally from the company’s registered office or from the agency appointed for dispatching the share certificates.
So, post-1996, NSE has come up with a plan to convert these physical share certificates to an electronics form. Instead of keeping this in paper form, they planned to keep all this information in electronic form in the name of your account. So, NSE introduced an account called the DEMAT account where investors can keep their shares in an electronic format. Earlier, the physical share certificates were in a material form (Materialization) and are now converted to electronics form by de-materializing the physical certificates. So, Dematerializing shortened to DEMAT. Thus, the era of the DEMAT account.
Like opening a savings account through a bank, a DEMAT account is opened through depositories. We have 2 depositories in India. NSDL (National Securities and Depository Limited) is controlled by NSE and CDSL (Central Depository and Securities Limited) which is controlled by BSE. An investor cannot directly open an account here, Depositories have Depository Participant (DP) which opens accounts in these depositories on your behalf. As of September 30, 2008, a total of 711 DPs (266 NSDL, 445 CDSL) are registered with SEBI. These depository participants are your brokers.
Thus, all these depository participants or brokers will get a unique DP ID from depositories. This is the identification number of the depository participant members. The DP will then allow you a Beneficial Ownership code (BO) which will be your account number. Your personal Demat account number or Beneficiary ID will be a combination of your DP ID and your BO code. For applying for IPO, you will be requiring inputting your Beneficiary ID, thus knowing this number is crucial for IPO application.
If you have a physical share certificate then, once the Demat account is opened with a DP, you need to surrender the physical certificates to the DP along with a Dematerialisation request form (DRF). Once you have surrendered the share certificates you will get an acknowledgment slip after which you have to wait for credit of shares to your Demat account. Once the share certificates are accepted, your units will get reflected in your Demat account.
We, in our new era with a DEMAT account, when you buy shares, it will directly get credited into your linked DEMAT account through your broker.
A trading account is a link between your DEMAT account and your bank account. Consider this scenario, you have money in your hand, how will you take that money and use it to buy a share? That is where trading account comes into play. You will have to deposit your amount into the trading account. From the trading account when you buy shares, the shares will be credited into your DEMAT account. Similarly, when you sell shares, shares will be debited from your DEMAT account. The trading account and trading terminal are controlled by the broker. The trading terminal is provided by a broker so you can buy/sell shares by logging into your trading terminal. You will have a unique ID and password from your broker, so as to login into their trading terminal.
Some advantages of the trading terminal and trading account
Reliable information: These trading platforms have valuable services to research reports prepared by experienced and knowledgeable professionals. These enable investors to make informed and better investment decisions leading to higher profitability in earnings.
Support: Trained professional offer round clock service and support regarding technical issues or issues while handling the platform. Additional alerts can be sent through SMS, mail, call when the price reaches your target.
Flexible: Most of the trading platforms are now app-based, making it easier to access them from any device. This also helps traders/investors to keep track of their trading/investments.
Transaction: since everything is online. Even the transfer of funds is hassle-free and conducting buy/sell is very easy. With advanced technologies, users are more in favor of trading in the stock market.
What happens when you buy a share?
First of all, you will need to add funds to your trading account. From the trading terminal, you can select the shares which you like to buy. You will have to decide which share to buy at which price, and how many quantities. When you click on buy, a buy order is placed in the trading terminal. It now matches your price and quantity with another trader who is willing to sell through the stock exchange. When a match is found, the order is executed, and you will have your shares. But, not in your Demat account, not immediately. For this, you need to understand what happens when the other guy sells shares to you.
When you’re buying a share and planning to keep it overnight, this means you’re buying the shares for delivery. Thus, if you’re selling your shares, this means you’re selling your delivery shares. To sell the delivery of shares, one must fill a form called Delivery Instruction Slip (DIS). DIS may be compared to the checkbook of a bank account. Thus, this receipt in the form must be submitted to the depository in order to receive securities (shares) in your Demat account. There are quite a lot of details to be filled in for DIS and are taken care of by the broker.
When you sell your shares, you can have 2 options. Either you can log into CDSL/NSDL each time you sell your share, generate a unique ID, and then proceed on selling the shares. Or you can give a POA to the broker. Power of Attorney (POA) is an authorization given by the account holder (you) in writing to a broker to carry out buy/sell transactions on your behalf. Thus, the Broker will do transactions on your behalf on your DEMAT account. In this case, the broker will sell your shares on your behalf.
In India, the settlement cycle is T (Trade day) + 2 days. Trade day will be the day where you executed your buy/sell order. This means it takes trade day plus 2 additional business days for the shares to settle in your Demat account. This means, for the broker to verify the DIS slip by the seller, depository to verify the DIS from the broker, confirmation of money transfer, and then only the depository will debit the shares from the seller's account and get it credited into the buyer’s account. Also, it takes some time for the company to keep your name in the record as a shareholder of the company. This is vital in order to receive company benefits like dividends.
Suppose you have executed your buy order in your trading terminal on Monday. These shares will reflect in your Demat account only after Wednesday, provided Tuesday and Wednesday is not a public holiday. Similarly, the money which is debited from you when you brought the shares will be credited to the seller's account only after T+2 days. Thus, from Thursday on, you have the option to sell your shares.
Note: On the same trade day, the broker generates a ‘contract note’ and sends you a copy. It’s like a bill generated detailing every transaction you made. A contract note typically shows a breakup of all transactions done during the day along with the trade reference number. It also shows the breakup of charges charged by the broker.
You must have heard this term, 3 in 1 account when you opened your savings account. This is a feature offered by the bank where they will give you the savings account, Demat account, and trading account altogether when you open an account in the bank. This means the bank will act as the broker, will have the trading terminal to trade as well.
Many of the well-known banks in India offer 3-in-1 accounts. The list of banks is ICICI, HDFC, SBI, KOTAK, IDBI, AXIS BANK, etc. If we take the case of HDFC, while the savings account is in HDFC bank, the broker account and trading terminal are provided by a subsidiary of HDFC called HDFC securities. Keep in mind, having a 3-in-1 account is good for beginners, but the brokerage (commission cut by a broker while selling shares) will be high because these banks act as full-service brokers.
By this, you should have got a fair idea of what are the 3 accounts required for trading and how are these 3 accounts interrelated with each other. And what do we mean by T+2 days and how are the shares getting transferred from one account to another.
Now, you’re all excited to start your trading journey, right? But wait, have you decided what kind of a trader/investor are you? Are you a day trader or swing trader? Are you a long-term investor or a short-term investor? Confused, right? Let’s understand all these and get to know which type of trading/investing style or strategy fits you.