How to start trading stocks
To start investing in the stock market you need to open two accounts mentioned below.
1. Opening a Demat Account
2. Opening a Trading Account
Before we proceed to the details of the Demat account first let me talk about the term depository.
Depository:
A depository is an organization or a system where securities (like shares, debentures, bonds, government securities, mutual fund units, etc.) of investors are stored in electronic form. This system facilitates faster, risk-free, and low-cost settlement.
A depository is similar to a bank and performs activities similar in nature. An analogy between a bank and a depository may be drawn as follows –
| Bank | Depository |
|---|---|
| Holds funds in an account. | Hold Securities in an account. |
| Transfers funds between accounts on the instruction of the account holder. | Transfers securities between accounts on the instruction of the account holder. |
| Facilitates transfers without having to handle money. | Facilitates transfer of ownership without having to handle shares. |
| Facilitates safekeeping of money. | Facilitates safekeeping of shares. |
Before the depository system was introduced in India, securities were held by investors in the form of physical certificates. During those days, the transfer of shares consumed a lot of time. Further, there were problems in handling physical share certificates like delays, theft, forgery, and mutilation. To eliminate these weaknesses, the Indian Government adopted the depository system.
The Depository Act of 1996 paved the way for the establishment of two depositories in India, namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
Depository Participants:
The Depository provides its services to investors through its agents called depository participants (DPS). These agents are appointed by the depository with the approval of SEBI.
According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions, and SEBI-registered trading members can become DPs.
It is important to note that an investor has no direct access to the depositories. He has to trade his securities through the depository participant.
Demat:
Demat is a commonly used abbreviation for the word ‘Dematerialisation’, which is a process whereby securities like shares and debentures are converted from the physical form into electronic form and stored in the computers of an electronic depository.
With effect from 31st March 2019, SEBI has made it mandatory to get physical shares ‘dematerialized’ in order to sell or transfer them.
Procedure for Dematerialisation of Shares:
In order to dematerialize physical shares, one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with the physical certificates one wishes to dematerialize. A separate DRF has to be filled for shares of each company.
Opening a Demat Account:
The avail of the services offered by the depository, you need to open a Demat account with a DP. This account opening process is similar to opening an account with any branch of a bank in order to utilize the bank’s services.
Entries in the Demat account and bank passbook are similar in nature. In case you buy shares, then there will be a credit entry whereas when you sell shares there will be a debit
entry.
You can open your Demat account with any bank or any share broker.
Factors to Consider while choosing a DP:
Some of the important factors which you need to keep in mind while selecting a DP are as follows-
1. Services Offered: Today with increasing competition, more and more DPs are providing value-added services to their clients.
Some of these value-added services include real-time valuation, timely alerts on inflows/outflows of securities, etc. Before choosing a DP, you need to check your requirements and then select a DP who is in a position to offer you the services that you require.
2. Cost: Every Demat account has certain charges associated with its operations. There are some fixed charges as well which you will have to bear even if you keep your Demat account idle. Some of the initial charges associated with the Demat account include –
- a. Annual Maintenance Charges
- b. Charges for debit from the Demat account
- c. Demat charges
- d. Charges for Pledging of securities.
Before you open a Demat account you need to look at the complete range of costs and select a DP whose charges are reasonable.
3. Accessibility: This is the most important aspect. Your DP must be near and easily accessible as you have just two working days to transfer shares from your account
to your broker’s account in case of a sell transaction.
Today, many DP are providing an internet-based facility for the transfer of shares. Because of this factor, normally it is advised to have your Demat and trading account in one place, i.e., preferably open your Demat account where you have your trading account.
Documents Required to Open a Demat Account:
Approach the office of the DP of your choice and fill up an account opening form. You will also have to sign an agreement with the DP which normally provides details about your rights and duties as well as those of your DP.
Along with the account opening form, you have to submit a self-attested photocopy of the following documents –
1. Proof of Identity – POI (any one of the following) –
- Aadhar Card
- Passport
- Voter ID Card
- Driving License
- Pan Card with photograph
- Identity card or any other document having
- applicants photo, issued by
- Central or State Government or its Departments
- Statutory or Regulatory Authority
- Public Sector Undertakings (PSU)
- Scheduled Commercial Banks
- Professional bodies like ICAI, ICWAI, ICSI, Bar
- Council, etc to their members
2. Proof of Address – POA (any one of the following) –
- Aadhar Card
- Ration Card
- Passport
- Voter ID Card
- Driving License
- Bank Passbook
Opening Trading Account
To buy shares that are trading on the stock exchanges, you need to open a trading account with a stockbroker.
Stock brokers are members of the stock exchanges and are authorized to buy or sell shares on behalf of their clients. These brokers and their sub-brokers have to be registered with SEBI.
Today, there are a large number of SEBI-registered brokers and sub-brokers in the market including banks, traditional brokers, online brokers, etc.
Factors to Consider while choosing a Broker:
Some of the important factors which you need to keep in mind while selecting a broker are as follows –
1. Reputation: Getting membership in a stock exchange is not a tough task. With so many brokers out there, it becomes very important to deal with a broker who has a good reputation.
Before selecting a stock broker, it is important to carry out a comprehensive background check on the company and its financial soundness. This can be known by looking at the past track record, especially during tough times like during the bear phase or when scams rocked the markets. A broker enjoying high credibility in the market should always be preferred.
2. Research: Today with increasing competition, most brokers are providing a variety of research-related services to their clients for free. Hence before selecting a stock broker, it is important to check whether the broker has a strong research team and what has been the accuracy of their research work in the past.
3. Brokerage Charges: The brokerage forms a significant part of the cost involved while dealing in securities and it can have a high impact on the profitability of your trades, especially if you are carrying out trading activities like intraday trading or derivatives trading.
So while comparing brokers of similar reputation and research capabilities, one should opt for a broker who is offering lower brokerage.
But at the same time, never compromise on the reputation and research capabilities of a broker just by looking at cheap brokerage rates.
4. Modes of Transaction: Today with the advancement of technology, you can buy or sell shares via a mobile app or online on a broker’s website, or through software that he provides. Apart from this you can always make a phone call to your broker and place an order.
If you are more tech-savvy and are wishing to place your orders via a mobile app or trading software provided by your broker then you should look into factors like features, speed, user-friendliness, and reliability of that app or software.
Once again note this is more crucial in case you are carrying out trading activities like intraday trading or derivatives trading as small delays or technical glitches can result in huge notional or real financial loss.
5. Customer Service: This is another important factor that you should consider while selecting a broker for opening a trading account.
Stock brokers can provide these customer services through various channels like online customer care service, relationship management services, customer service at branch offices, etc.
Not all stock brokers offer customer service through all these channels, especially the online discount brokers offer customer services mainly through online platforms with no face-to-face interaction.
So, before selecting any broker, you need to check out the customer service channels offered by the stock brokers and match them with your needs.
Documents Required for Opening a Trading Account:
To open a trading account with a broker you need to fill up an account opening form. Along with the account opening form, you have to submit a self-attested photocopy of
following documents –
1. Proof of Identity- POI (any one of the following)
- Pan Card with photograph
- Aadhar Card
- Passport
- Voter ID Card
- Driving License
- Identity card or any other document having
- applicants photo, issued by
- Central or State Government or its Departments
- Statutory or Regulatory Authority
- Public Sector Undertakings (PSU)
- Scheduled Commercial Banks
- Professional bodies like ICAI, ICWAI, ICSI, Bar
- Council, etc to their members
2. Proof of Address – POA (any one of the following) –
- Aadhar Card
- Ration Card
- Passport
- Voter ID Card
- Driving License
- Bank Passbook
- Electricity or Landline Telephone Bills (not more than three months old)
- Leave and License Agreement
- Identity card or any other document having the applicant’s address, issued By
- Central or State Government or its Departments
- Statutory or Regulatory Authority
- Public Sector Undertakings (PSU)
- Scheduled Commercial Banks
- Professional bodies like ICAI, ICWAI, ICSI, Bar Council, etc to their members
3. Proof of Income (any one of the following) –
- Income Tax Return (ITR) Acknowledgement Copy
- Net Worth Certificate certified by a C.A.
- Proof of Salaries like a recent Salary Slip or relevant document like a form 16
- A statement of Demat account holdings issued by DP Depository Participant
- Current bank account statement reflecting the income history of the client for the past 6 months
Note: Proof of Income is required only if a person wishes to trade in the derivatives segment i.e., in Futures and Options.
4. Proof of Bank Account –
- Canceled Cheque
Note: PAN Card is mandatory for opening a trading account.
While opening your trading account, your stock broker will ask for photocopies of documents; they will need originals
for verification. You will have to submit a passport-size photograph as well.
Nomination in Demat Account:
It is the Demat account that holds all your investments in shares hence it is always advisable to have nomination mentioned in it.
In order to appoint a nominee, duly filled-in nomination
the form has to be submitted to the DP.
The facility of nomination is available to individuals holding beneficiary accounts either singly or jointly. If the account is held jointly, all the joint holders are required to sign the nomination form. The facility of nomination is not available to non-individual entities like trusts, corporate, Hindu Undivided Family (HUF), partnership firms, holder
of power of attorney, etc.
Only an individual can be appointed as a nominee and non- Individual entities cannot be appointed as nominees. You can nominate only one person as a nominee of your Demat
account. This person can be a major or a minor.
In cases where a minor is a nominee, the guardian will have to sign on behalf of the nominee, and in addition to the name and photograph of the nominee, the name and address, and photograph of the guardian have to be submitted.
This process of nomination can be done while opening the demat account or can be done later. You can also change the nomination anytime by simply filing the nomination form again and submitting it to the DP. I think, Now you’ve got an Idea of How to Start Trading Stocks? Further more information keep following us.
