Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
To participate in the Indian stock market, you need two accounts – a demat account and a trading account. Unlike a demat account, a trading account is only an optional requirement. That said, having such an account can make buying and selling securities through a stock exchange a lot more seamless and hassle-free.
If you’re new to the stock market, you may not be aware of what a trading account is. If that’s the case, then here’s a comprehensive guide on how a trading account works and the various advantages it provides.
Table of Content
What is a Trading Account?
Before we take a look at the answer to ‘how does a trading account work?’, here’s a quick overview of what this account actually is.
A trading account is an account that facilitates the purchase and sale of shares and other securities on a stock exchange. It is an electronic platform that allows you to place buy and sell orders for securities listed on exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Some of the securities that you can purchase and sell via a trading account include equity shares, preference shares, Differential Voting Rights (DVR) shares, bonds, debentures, derivatives like futures and options, mutual fund units, Exchange Traded Funds (ETFs), commodities and currencies.
How Does a Trading Account Work?
Now that you know what a trading account is, let’s try to understand how a trading account works with the help of a hypothetical example.
Assume that you wish to purchase 50 shares of XYZ Industries Limited. Using your trading account, you place a buy order for 50 shares of the company for ₹2,400 per share. Once you submit the order, the trading account forwards it to the concerned stock exchange. The exchange matches your buy order with a corresponding sell order with the same price of ₹2,400 per share. If the orders match, the trade will be executed and the 50 shares of XYZ Industries Limited that you purchased will be automatically transferred to the demat account linked to your trading account.
Similarly, if you wish to sell the 50 shares of XYZ Industries in your demat account, all you need to do is place a sell order via your trading account. The sell order will be forwarded to the stock exchange, where it will be matched with a corresponding buy order at the same price. Once the sell order is executed, the shares will be automatically transferred out of your demat account.
What are the Advantages of a Trading Account?
Now that you have the answer to ‘how does a trading account work?’, here are some of the key advantages of this account.
- Simple and User-Friendly
Most trading platforms of stockbrokers are designed to be simple and user-friendly. Even beginners who have limited knowledge of how the stock market works can quickly grasp the various mechanisms with just a little effort.
- Speed
One of the major advantages of a trading account is the speed at which trades are executed. Earlier, before the advent of a trading account, purchasing and selling securities were done physically, which used to take a lot of time and effort. However, with a trading account, it only takes a few seconds to execute a buy or sell order.
- Accessibility and Convenience
Since the trading account is an electronic account, you can access it from almost anywhere in the world. All you need is a computing device with a reliable internet connection. Furthermore, almost all stock brokers in India these days offer a dedicated smartphone app, allowing you to access your trading account and place orders even while you’re on the move.
- Transparency
Trading accounts bring about price transparency. You can view the list of bid prices and ask prices for almost every security, enabling you to make an informed investment decision. Moreover, you also get to view the progression of your trade from end to end in real time.
- Complete Control Over Trading
Trading accounts offer maximum control over your investment decisions. For instance, you are free to choose the security, the price and even the kind of order you wish to place. Once an order is placed, you can revisit it and make modifications before it is executed by the stock exchange.
- Access to Powerful Trading Tools
When trading accounts were first introduced, they were designed to only be a platform for placing buy and sell orders for securities. However, of late, they have become more of a comprehensive portal with a host of additional functions and trading tools. This includes access to technical charts, fundamentals of securities, research ideas, stock screeners and other analytical tools.
Conclusion
With this, you must have now gotten the answer to the question ‘how does a trading account work?’. Having a trading account opens up a world of possibilities which you may not be able to enjoy with just a demat account. So, if you’re planning on trading or investing in the Indian stock market, it is advisable to open both trading and demat accounts for a seamless experience.
