So, you are looking to invest in the share market? And most likely, you have already opened a trading account or are actively looking to open one. But do you know there are multiple trading account types that you must be aware of?
Furthermore, each of these trading account types has their own propositions, their own benefits, and limitations.
But let’s start with the basics first!
Trading Account Types in India
The term “Demat” means dematerialization. The concept of dematerialization was introduced in the securities markets in India in 1996 when the National Securities Depository (NSDL) was established. The organization promoted dematerialization to improve settlement efficiency on stock exchanges.
Dematerialization means the shift from physical certificates to electronic bookkeeping. Dematerialization applies to Equity, bonds, commodities, mutual funds, government securities, etc. It is helpful in increasing the security and surety of transactions and making the whole process of clearing transactions faster.
In simple terms, a Demat account is used as a bank where shares are stored in electronic form.
On the other hand, a trading account is used to make buy and sell transactions. If one wants to trade in shares, it is mandatory to have a Demat as well as a trading account. There are different trading account types and Demat accounts that can be opened with a broker for trading and investment purposes.
Let us discuss them one by one:
1. Equity Demat Account:
This is one of the Demat account types that is used for keeping shares in electronic form. When one buys any shares, they are stored in the account and when they are sold, they are taken from this account. If one wants to trade only in futures and options, then, in this case, an equity Demat account is not needed.
This is because all futures and options contracts have expiry dates. They do not need to be stored.
First of all, funds need to be transferred to the trading account. On the completion of the transference of funds, one can buy/sell shares and Futures & Options.
There are two ways of making these transactions:
Offline – If one wants to trade offline, then, one can make the desired transactions by calling the broker and giving him instructions. Another offline way is to physically visit the broker’s office and placing one’s orders. This offline account opening process is cumbersome and more time-consuming.
Online – Online trading can be done in a more convenient and efficient manner than offline trading. In this, the user can make all the transactions either by using a trading software built by the broker or by using a mobile trading app sitting in the comforts of one’s home or anywhere.
On a trading account, all the settlements are done on T+1 day. It means that if someone has made a profit of ₹20,000 on T day, then, this profit would be available for withdrawing only on T+1 day. However, it can be utilized for making any other transaction on T day as well.
If one is trading in commodity futures, then, the settlement can be done either through cash or by the delivery of a commodity.
Before the introduction of the Demat system, in case of delivery of the commodity, the seller used to deliver warehouse receipts to the clearinghouse of the commodity exchange.
After that, the clearinghouse would pass those warehouse receipts to the buyer. Warehouse receipts are documents issued by warehouses to depositors against the deposited commodities.
Now, since the whole process of paper warehouse receipt system was cumbersome, inexpensive, and inefficient, commodities had also shifted to Demat form in 1996.
Therefore, a commodity Demat account is needed to store those warehouse receipts in electronic form.
4. Commodity Trading Account:
A commodity trading account is opened with a commodity broker registered with a recognized commodity exchange in India. The Multi Commodity Exchange (MCX) and the National Commodity & Derivatives Exchange (NCDEX) are the most common commodity exchanges in India.
First of all, funds need to be transferred to the commodity account. On the completion of the transference of funds, one can make buy and sell transactions in commodities. The settlement in all commodity trades happens on T+1 day. One can trade in commodity futures.
You can read this detailed review in Hindi as well.
However, unlike shares, there is no Options trading in commodities in India currently!
Now, after knowing all the different trading account types as well as Demat account types and their respective uses, let us understand the two trading account types’ opening options that are available to investors:
2-in-1 Accounts: The 2-in-1 account integrates the Demat account and trading account. Its purpose is to ensure seamless transfer of shares from trading to Demat account on T+2 day when shares are bought.
3-in-1 Accounts: The 3-in-1 accounts have an additional facility of integrating banking services with Demat and trading accounts. Most of the banks which also offer brokerage services offer 3-in-1 accounts as they have a banking interface in place. The purpose of the 3-in-1 account is to ensure the seamless transfer of funds from a bank to the trading account. Although it is not a huge advantage because most of the broking platforms, with the advent of online banking, also allow investors to transfer funds from their banks to the trading accounts seamlessly.
On the basis of the services provided, there are the following trading account types:
Discount brokers trade huge volumes at very low costs.
They offer only the execution of trades. They do not provide any additional perks like advisory services or research services to their customers.
This is the reason why they can offer very low brokerages since they have relatively low operational costs. Also, they do not offer an offline facility for making transactions other than a call and trade option. This facility is generally chargeable.
A full-service account offers a number of services other than the plain execution of trades.
These services may include advisory services through which one may talk to financial advisors if he feels stuck in positions. Full-service trading accounts may also include research services which may help an investor save a lot of time in researching about the whole market for making trading decisions.
After understanding different trading account types’ opening options, one should carefully decide what kind of account would suit him the best as per his requirements. Happy trading!
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