One of your primary relationships with a broker is built through a trading account. You need to open a trading account to buy and sell shares in the stock market. However, you need to be aware of a variety of accounts such as what is BO ID, what is a trading account, what is Demat account and types of Demat account, separate classes of accounts, etc. are a few things that you need to know.
Types of Demat account
Essentially there are three types of Demat account:
- Regular Demat account: Traders who reside in India use this type of account.
- Repatriable Demat account: This is a Demat account which is useful to the Non-Resident Indians as it allows fund transfers abroad. Such a Demat account requires an associated NRE bank account.
- Non-Repatriable Demat account: This account, too, is for the Non-Resident Indians. However, in this case, funds cannot be transferred abroad, and this account requires an associated NRO bank account.
Only trading account or only Demat account
The normal belief is that you need to open a trading account and a Demat account simultaneously. Actually, you can choose to open only one of these accounts. For example, if you want to invest in an IPO, then Demat account alone is sufficient. Once the shares are allotted to you, the shares will be credited to your Demat account. The only catch here is that you cannot sell the shares unless you have a trading account. Hence, you are buying shares purely with a view of holding them for the long term, then Demat account alone is sufficient. On the other, if you only want to trade in futures and options, then you need not open a Demat account. A trading account alone will be sufficient since F & O does not result in delivery. It is only when you want to hold equities that you require a Demat account.
Equity trading account and Commodity trading account
Your equity trading account is sufficient for trading in equities, futures and options. With regards to commodities, it is currently not possible to trade in commodities with your existing equity trading account. You will need a separate commodity trading account which you will have to open with your broker. This is largely due to the fact that commodities were under a different regulator in the past. It is only in the last 2 years that the FMC was merged into SEBI, and the commodity market regulation was also brought under SEBI. This could change as the regulator looks to further integrate the equities and commodities segments. It is interesting to note that currency derivatives can be dealt in your existing equity trading account itself.
Online versus Offline trading accounts: 2-in-1 account versus 3-in-1 account
Let us look at the primary classification here. Offline trading accounts are the traditional accounts that do not offer internet trading. You can call up your broker or walk into your broker’s office and trade. The online accounts, on the other hand, offer internet trading. That means you can execute your trades sitting in the comfort of your home or your office using your laptop, PC, or even your smartphone. An online account tends to attract lower brokerage and is also a lot more convenient and flexible for the trader.
Within the ambit of online trading accounts, let us also understand the difference between 2-in-1 accounts and 3-in-1 trading accounts. The 2-in-1 trading account basically integrates the trading account and the Demat account. Thus, when you buy shares in your trading account the movement into your Demat account on T+2 day is seamless. Similarly, when you sell shares, the debit to your Demat account on T+1 date is also seamless. The 3-in-1 account is offered by brokers that have banking operations within the group. Thus, ICICI Securities, HDFC Securities, Axis Securities, and Kotak Securities are all able to offer 3-in-1 accounts due to their banking interface. While 2-in-1 accounts are a must to ensure a seamless relationship between trading and Demat, the 3-in- 1 is not a major advantage as most broking platforms will allow you to transfer funds almost seamlessly into your trading account.
Discount broking accounts versus full-service trading accounts
This distinction has gained prominence in the last couple of years with the emergence of discount brokers who trade huge volumes at a very low cost. These discount brokers do not offer any research or any add-on advisory services. They just offer plain execution of trades which is why they are able to offer services at a very low brokerage. Similarly, these discount brokers do not offer offline facility for placing trades except a call-and-trade facility, which is chargeable in most cases.
The full-service model will charge a higher brokerage but comes with a host of services. For example, there is research, short-term calls, advisory desk, and advisors to help you if you get stuck in positions. These are some of the premium services that you will get when you opt for a full-service trading account against a plain vanilla discount broking account. While the trading account enables you to trade on the BSE and the NSE, the commodity trading account enables you to trade on the NCDEX and the MCX. Remember, for commodity trading, you need to open a separate commodity trading account and a separate commodity Demat account.