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
Savings account
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.
DEMAT account
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.