When it comes to online trading and investing, Demat accounts take the cake for popularity. However, a Demat account is the final destination of a stock. In between, there is an interface that makes buying and selling stocks possible. That’s known as a trading account.
What is a Trading Account?
A trading account is an interface that allows traders and investors to buy and sell stocks. Think of it as a link between your bank account (used to transfer funds) and Demat account (used to store shares).
In India, a trading account is mandatory if you want to invest or trade in stocks, commodities, currencies, ETFs, and other financial securities.
That’s because registered market participants like stockbrokers are the only ones authorized to place buy and sell orders. Guess who allows you to open a trading account?
The very same registered stockbrokers like Dhan! You, as a retail trader or investor, can thus use a trading account to buy or sell shares via the stockbroker.
What is a Trading Account Used For?
While a demat account is used to store stocks, a trading account is used to place buy and sell orders. Once you place an order, the request is sent to the stock exchange (NSE or BSE). The exchange then proceeds to verify and processes your request.
The trading account’s job is done. After the order is processed, the shares are stored in a demat account.
Before all of this, however, it is important to fund your trading account. This basically means transferring money from your bank account to your account for trading via net banking, UPI, and other methods.
Here’s an example. Say Mr. Super Trader wants to trade currency futures. He has a strategy ready. He has the market understanding to execute that strategy. But he needs the means to place buy and sell currency futures orders.
Mr. Trader can’t do this himself – only an authorized broker can. In steps Lightning-Fast, a platform that’s offered by an authorized broker. Mr. Trader now has the option to start buying and selling currency futures with a trading account.
All he has to do is go through the KYC, deposit the required margin, and begin. That’s exactly what Mr. Trader does. He now has the means to place buy and sell orders for currency futures.
Difference between Trading Account and Demat Account
Truth be told, there are multiple differences between trading and Demat accounts even though they’re almost always mentioned in the same breath. We’ve touched on one of those differences in the previous section.
Now it’s time to dig in deeper so that you can find out exactly how a trading account is different from a Demat account.
1. Use of Trading Account
A trading account is used to place buy and sell orders. A Demat account is used to store the shares that have been allotted after you’ve placed a buy order using your trading account.
2. Is a Trading Account Mandatory?
Without a trading account, you won’t be able to trade securities like stocks, commodities, ETFs, and more or derivatives like futures and options. That’s why a trading account is mandatory in many cases.
On the other hand, a futures or options trader may not need a Demat account the delivery of shares or commodities may not be involved. This makes Demat accounts optional.
The outlier is an IPO where you can get allotted shares directly into your Demat account without the need for a trading account. You could also say that swing traders, who are different from investors, may also require both trading & demat account.
3. Fees & Charges
First off, there are two types of brokers:
- Traditional brokers
- New-age brokers
Both have different pricing models for opening a trading account. Traditional brokers may charge a fee because they’re full-service brokers, meaning they offer a boatload of features that you may or may not use.
On the other hand, new-age brokers offer streamlined features that are built to be functional. That’s why new-age brokers like Dhan allow you to open a trading account for free.
More often than not, the pricing of trading and Demat accounts is similar. Head over to this page to know more about all the fees that are applicable during and after opening a trading account.
Benefits of Using a Trading Account
The primary benefit of using a trading account is being able to buy and sell stocks, commodities, currencies, ETFs, and more. But that’s not all.
The goal of trading and investing in stocks is to generate lucrative returns. Features that improve and optimize your trading experience are thus necessary to help you achieve the ultimate goal.
This is precisely why it’s important to choose the best trading account that offers the right features.
For example, Dhan offers lightning-fast features that are built to offer a seamless trading experience in India. This includes:
- TradingView features like trading directly from charts
- Advanced option chain which is an industry-first feature
- Curated smallcases for investors who want handpicked stocks
Here is a walkthrough of one of the best features that a trading account can give you access to:
How to Open Trading Account Online?
The steps to open an online trading account are more or less straightforward. We’ll walk you through each step in detail.
Step #1: Select the Right Stockbroker
We discussed that a trading account can make or break your trading experience. That’s why it’s important to do your own research before selecting a stockbroker.
For example, traders may want to check whether there are trader-friendly features like Webhook alerts available while investors may want to understand if there are long-term features like Dividend View available.
Step #2: Evaluate Trading Account Fees
Once you’ve selected a stockbroker, it’s necessary to evaluate their pricing model. While pricing varies across brokers, some standard fees apply that you could use as a benchmark for comparison.
Step #3: Complete KYC
Every stockbroker will require you to complete a KYC in order to open a trading account. Here are the documents you’ll need to furnish to complete your KYC:
- Photo ID proof: PAN Card/Passport/Driving License/Aadhar Card/Voter’s ID
- Address proof: Electricity Bill/Passport/Voter’s ID/Rent Agreement/Telephone Bill
In some cases, stockbrokers may also require you to upload a passport size photograph and your signature. Most platforms have switched to a paperless KYC these days. Here’s how paperless KYC works on Dhan.
Step #4: Wait for Verification Approval
Once you’ve submitted your form, you’ll have to wait for regulatory approval. This usually takes T+1 days.
Step #5: Start Trading
After your application has been approved, you’ll be able to buy and sell stocks using your newly opened trading account. Before that, you’ll have to fund your trading account using net banking, UPI, or other modes.
We started off with a simple question – what is a trading account – the answer is an interface between your demat account and exchanges like NSE, BSE, and others.
While a trading account is mandatory for trading commodity, stock, and currency futures, and options, it is also necessary for those who invest in shares and ETFs. The reason? How else will you place buy or sell orders!
Most brokers allow you to open two in one account that’s both a demat and trading account and the process is generally swift (lightning-fast if you’re on Dhan).
Happy Trading 📈
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- What is Swing Trading?
- The Complete Guide to Anchored VWAP Indicator
- PIP Calculation in Forex Trading Explained!
FAQs on Trading Account
Q. Why Do We Need a Trading Account?
Having a trading account makes it possible to buy and sell shares in the stock market. Think of a trading account as a means to execute trades that is offered by a stockbroker. It is linked to your bank account and Demat account.
Q. How Do I Create a Trading Account?
You can create a trading account online by downloading an app like Dhan. The process is simple – all you have to do is go through a lightning-fast KYC process explained in this account opening video.
Q. Can I Trade Without a Trading Account?
It’s not possible to trade without a trading account because you won’t be able to place buy or sell orders. However, investing in IPOs does not require you to have a trading account.
Q. What is a Trading Account Very Short Answer?
A trading account is used for placing buy or sell orders and is typically provided by a stockbroker like Dhan.
Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.