As the world moves more toward digitization, technological adaptation in all fields is increasing. The days of hiring a physical broker or visiting a stock exchange to execute a trade are long gone. With the invention of technology and the internet, a trader can now trade shares online, not to mention the convenience of easy access to both share information and online trading in general.
There are a few critical components of online trading without which trade execution is impossible. These are the following:
- Bank Account,
- Trading Account and,
- Demat Account.
Almost everyone in India now has a bank account and understands its significance and purpose. But, let’s find out why a bank account is such an essential component of online trading. A bank account is used to transfer funds/add funds to a trading account to facilitate the execution of online trading.
What is a Trading Account, and how does it work?
Another important aspect of online trading is a trading account. It is a website that allows you to buy and sell stocks online. It serves as a link between the investor and the stock exchange.
To begin online trading in the Indian stock market, you must first apply for opening a trading account with any authorized stockbroker. The stockbroker is a registered member of the stock exchange, and they provide you with trading account access to the stock exchange platform. The stockbroker acts as a middleman for the investor and the stock exchange. They also offer stock market investment advice and guidance.
You must provide personal information such as your name, address, PAN number, and other necessary details when opening a trading account. After you open the account, you can deposit funds into it, which can then be used to purchase stocks. You can use the trading account to place an order to buy or sell stocks, and the stockbroker will execute the trade on your behalf. Supply and demand will determine the stock price, and the stockbroker will charge you a commission for executing the trade.
Now that we’ve covered what is trading account and its functions, let’s move on to dematerialize or Demat accounts.
What is Demat Account, and how does it work?
The Securities and Exchange Board of India (SEBI) brought into the Indian stock market the Dematerialize account (Demat account) in 1996. Demat accounts have made trading easier and faster than before thanks to the use of digital technology.
A Demat account is an account that stores your shares electronically rather than physically. To open a Demat account, go to a Depository Participant (DP) and provide the required personal information and documents.
Demat accounts operate in the same way the bank accounts do. When you buy stocks/shares, the funds are transferred automatically to your Demat account, linked to your trading account.
Your broker transmits to the stock exchange, the order you place through your trading account, which can be either bought or sold. The stock exchange matches the received request with the corresponding request of another trader. When your order is matched, a stock exchange order is sent to a clearing house, which settles the trade. By the time the stock market closes, the number of shares you purchased/sold is credited/debited to/from your Demat account when the transaction is deemed complete.
In conclusion, these accounts provide significant advantages over traditional stock market investing methods, making the process of investing/trading easier, faster, and more convenient. Having a trading account, a Demat account and a Bank account is an essential step towards stock market investment and is a must for all kinds of traders/investors. Everything else follows after you finish creating these accounts.
