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Looking to invest in stock market? Understand the types of trading accounts

Prior to making an investment, it is vital to know its prerequisites. In case of stock market trading, for instance, it is mandatory that a trader opens three different accounts. We shed light on the three types of accounts that are imperative to trade.

India’s stock markets delivered 16.4% CAGR in the following four years. Photo: MintPremium
India’s stock markets delivered 16.4% CAGR in the following four years. Photo: Mint

Before you begin your investment journey, you must possess three accounts, which are demat account, trading account and bank account. Each account serves its own unique purpose, but they are dependent on each other for a trade to complete. After having opened all three of them, the investor is eligible to trade.

Trading account

The trading account plays a key role in buying and selling of shares in the stock market. This account is a must-have to undertake any trading activities. It is important because when a company lists its shares in the stock market, the investor can buy and later sell them electronically through their trading accounts. Upon opening this account with help from stockbrokers, the account holder is allotted a unique ID that allows them to perform trading transactions.

Bank account

A bank account is an account that an individual must set up with a bank to deposit their money. This account indicates the financial transactions of the depositor from time to time. It tracks the credit and debit of money into the account orderly.

Demat account

Demat account is the account that allows the investors to hold the shares they bought in an electronic format. This account holds dematerialised versions of physical shares and stores them. The functioning of the demat account is very similar to that of a bank account with a replacement of shares instead of money. Whenever the trading takes place, the shares are either credited or debited from the demat account.

However, the opening of a demat account does not mandatorily require any prior holding of shares. This account can be opened even with zero balance.

Although each of these three accounts serve their own unique purpose, they are interlinked and work together to enable investors to trade in stocks. Initially, the trading of shares takes place through the trading account.

In case shares are bought, the money gets debited from the bank account and credited to the seller of shares, and the demat account gets credited with the shares that are bought. When the shares are sold, the bank account gets credited and the demat account gets debited. Thus, all three accounts are instrumental to carrying out trading in the stock market.

 

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Updated: 25 May 2022, 09:31 AM IST
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