What is a trading account?

As you probably know, demat account is essential for holding your securities in today’s digital age. But note the careful usage of words! A demat account, while it may allow you to hold your securities, will not allow you to ‘transact’ – that is, buy or sell securities. For that, you’re going to have to open a trading account.

Key Points

  1. A trading account is mainly known to facilitate multiple objectives that are essential for all types of trading – right from helping you manage expenses to keeping a careful control on your choice of transactions.
  2. A trading account is typically used by traders to speculate about the movements of the assets, with an expectation of a decent profit.
  3. There are two types of trading accounts: a securities/standard trading account and a commodities trading account.

Objectives of a trading account

A trading account is mainly known to facilitate multiple objectives that are essential for all types of trading – right from helping you manage expenses to keeping a careful control on your choice of transactions. As the name suggests, a trading account helps customers trade in securities.

Additionally:

  • A trading account helps the broker or the investment dealer to keep track of progress by comparing the present figures with those of the previous trading year.
  • The gross profit percentage on net sales (gross profit sales) can be easily determined by the trader. The trader or the broker can keep a track of the gross profit and determine the profit percentage that you’ve gained on transactions. The gross profit should be adequate enough for indirect expenses.
  • You can conduct proper planning and research to improve the results of your investments made through the trading account, thanks to the vast array of data available to you.
  • Your broker can keep a track of the stocks at the open and end of a particular trading day.
  • The stock turnover ratio can be determined from your trading account. This rate can be used to measure the failure or success of the business.

Basics of Trading Accounts

A trading account is essentially used to facilitate transactions such as stock trading, mutual fund investments (or redemptions), ETFs and more. Additionally, it can also keep a track of cash, securities, foreign currency and other transactions.

Investors use a trading account for transactions involving stocks, commodities and other securities. A trading account is typically used by traders to speculate about the movements of the assets, with an expectation of a decent profit.

An investor can also open multiple trading accounts with different brokers for several purposes. Here are some of the most popular reasons why traders tend to use their trading accounts:

  • Day-trading activities
  • Long term investment
  • Retirement savings
  • Education and health insurance planning

In a trading account, only direct expenses and revenue are considered. Direct expenses are considered on its debit side, while direct revenue is considered on its credit end. No item related to the past year is considered. If the credit side has a bigger total than the debit side, it indicates a profit, and vice-versa.

How to open a trading account

For investing in securities, you necessarily need a demat account and a trading account. In fact, if you’re trading futures & options, you could possibly go without needing a demat account, but not without a trading account.
Here are the steps for opening a trading account online:

  • First, you need to select a broker. The broker must respond to your demands in a timely order. Time is money–especially when dealing with the stock market. A smooth and intuitive user interface is key to saving time.. Ensuring that you choose a good broker from the beginning of your trading life is a very important decision. Speaking of which, have you checked out Upstox Pro?
  • Next, you should compare the brokerage rates. Each and every broker or firm charges a processing fee. And then there are some of the good ones that don’t.
  • Get in touch with the brokerage firm and read whatever you find about their account opening procedure.
  • The firm would either send a representative to your house or office with the demat account opening form and Know Your Client (KYC) form, or allow you to open the trading account online. You have to fill up or submit those forms and give them the required documents [proof of identity, proof of address, proof of bank account (cancelled cheque or bank statement)] to carry on the process.
  • Your forms will be verified on the phone or through an in-person check and you will have to disclose your personal details.
  • Once all the procedures are completed you will be provided with the details of your trading account.
  • Now, you should be all set to conduct trades in the stock market.

Types of trading accounts

A Standard trading account covers all the basics. It allows you to trade equity intraday and delivery, futures & options, mutual funds, exchange traded funds (ETFs) and currency futures. This is ideal for short-term traders leveraging their funds at a high frequency.

A Commodity Trading Account is one you’ll need to open if you’re planning to trade in commodities such as gold, silver, crude oil and copper. A commodities broker is who you need for this process. A commodities broker is an individual broker or a firm that is a trading member of a recognized commodity exchange like the MCX. With a commodity trading account, you can trade commodity futures, and therefore would not need this to be linked to your demat account.

You can open only one trading account with one broker. That just means that you can’t have multiple trading accounts with just one broker. However, you can hold multiple trading accounts provided your brokers are different.

Clearly, a trading account is a necessity for an investor, on par with a demat account. The online trading account opening process has gotten far simpler than before, making it even more lucrative to jump in and become a part of India’s success story as its markets scale new heights.

Wrapping Up

  • A trading account is essential to conduct transactions in stocks, commodities and other securities.
  • A standard trading account allows you to trade in futures & options, mutual funds, currency futures and ETFs.
  • A broker who is licensed to place trades on your behalf on MCX i.e. the commodities segment can open a Commodity Trading Account for you.
  • You can trade in commodities such as gold, silver, crude oil and copper using a Commodity Trading Account.
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