Trading Account: Know its Meaning, Benefits, and Account Opening Process

While opening a Demat account is the first step to begin trading, having a trading account forms the second most vital step. A Demat account holds all your securities and certificates in electronic formats for easy access while trading. 

 

Similarly, a trading account helps you trade in the stock market using those stored securities or shares. Hence, understating the meaning and use of a trading account is a crucial step before venturing into the trading process.

 

A trading account is a platform that facilitates buying and selling securities in the stock market. It is a place where you deposit funds and execute your trades. Trading accounts can be opened with banks, brokerage firms, or other financial institutions.

 

You can access various stocks across national and international markets with a trading account. In addition to that, a trading account can be used to maintain your business transactions. So, what is a trading account in accounting?

 

Here, the account’s sole purpose is to gauge the profits of goods manufactured, sold or bought in business. Hence, in accounting terms, a trading account is a statement that a business firm prepares to show the gross profits achieved.

When you open a trading account, you are given a unique login ID and password you can use to access the trading platform. A trading platform is a software that lets you buy and sell securities online. You can place your order on the trading platform, which is sent to the exchange through your broker. Based on whether you have placed a buy or sell order, the required amount of transaction takes place from your bank account. Hence, a trading account is connected to your bank as well as a Demat account.  

 

To give an example, when you place an order to sell shares through the trading account, it is sent for further processing. As per the sell order, the securities stored in your Demat account will be sold by the broker. Further, the funds received from the trade will be credited to your bank account.

Different trading accounts are available, depending on your investment goals. Here are some common types:

 

• Cash Account:In a cash account, you must have a sufficient cash balance before placing an order. You cannot borrow funds from your broker to initiate transactions.

• Margin Account: Here, you can borrow funds from your broker for trading. This lets you buy additional securities. However, the risk is involved when your purchased securities lose their value. At this point, the broker may insist you submit the securities or credit funds in the account.

• Option Account: An option account allows you to trade at a specific rate and time. However, you can open this type of account only if the broker accepts your net worth.

Opening a trading account online is an easy and convenient way to invest in the stock market. Here are the simple steps to follow: 

• Step 1: Choose a brokerage firm that meets your requirements and offers a competitive commission rate

• Step 2: Provide your KYC details and submit the relevant documentation

• Step 3: Complete the online application accurately

• Step 4: Add funds to your trading account from your bank account using a credit or debit card

• Step 5: Get your account details after your application is verified

   

Before investing real money, it is essential to do your research and understand the risks involved. Consider starting with a demo trading account to practise trading.

Similar to a savings account, it is mandatory to submit KYC documentation to open a trading account. Here are some essential documents you need to provide.

• Type of the Trading Account

There are different types of trading accounts based on your investment goals, with each account having a distinguishable set of features. Hence, before opening a trading account with any broker, you need to understand the type of trading account that best suits your financial objectives.

• Platform Interface

All brokers have different user interfaces for their platforms. You can select a broker with an easy-to-use interface, depending on your preference. Remember that the trading platform needs to be fast and accessible from any device.

• Fee Structure

Brokers charge a nominal fee for using their platform. These charges may differ from one broker to another, depending on the platform features. Hence, before opening any trading account, make sure to check the fee structure and other applicable charges.

• Brokerage Fees

This charge is applicable to each transaction you initiate from your trading account. When opening a trading account, make sure to check the brokerage fees. Then, compare different brokers to select the trading account offering the best service with the lowest charge.

• Service Quality

When it comes to trading accounts, it is ideal to select a broker providing exceptional services. Hence, it is important to conduct thorough research before finalising a broker.

Here are some common phrases usually used in the stock market. Knowing them can help you understand the trading process better.

• Bid and Ask Prices: These are the prices at which buyers and sellers are willing to trade a security. The bid price is the highest price a buyer is willing to pay, while the asking price is the lowest price a seller is willing to accept.

• Market Order: A market order is buying or selling a security at the current market price. Market orders are executed quickly, but the price you pay or receive may differ from the quoted bid or ask price.

• Limit Order: A limit order is buying or selling a security at a specific price. For example, if you place a limit order to buy, you will only buy the security if the price falls to or below the limit price you set. Likewise, if you place a limit order to sell, you will only sell the security if the price rises to or above the limit price you set.

• Stop Loss Order: A stop-loss order is an order to sell a security if the price falls to a specific level. Stop-loss orders can be used to limit losses on a trade. For example, if you buy a stock at ₹500 and set a stop-loss order at ₹450, your shares will be sold automatically if the price falls to ₹450 or below.

• Margin: Margin is the money you borrow from a brokerage firm to purchase securities. This allows you to amplify not only your gains but also your losses. Hence, understanding the risks of margin trading before using this strategy is essential.

• Day Trading: As the name suggests, in this type of trading, you buy and sell your securities on the same day. Traders opt for this strategy to take advantage of short-term fluctuations in the market. This strategy is preferred by seasoned investors willing to take high risks for great returns.  

 

A clear understanding of how trading accounts work is an essential tool for success in the stock market. Get more details on trading and related avenues at www.bajajfinservmarkets.in.

 

However, remember that trading on the stock market has risks, such as market, operational, liquidity, credit, and legal risks. That said, it is crucial to approach trading cautiously and always do your due diligence before making investment decisions.