There are some basic requirements that must be met before a person can begin the process of buying, holding, and selling shares. This document is a basic guide to explain these requirements. Please note that this document does not provide any advice on which stocks to buy or which investment strategy is best suited to an individual. This is a starter guide for individuals based on my own experiences.
The 3 basic things needed to get started are:
*Dmat account
* Trading account
*Bank account
dmat account
A Dmat account is like a bank account, except that instead of cash, a Dmat account has shares. Therefore, if shares are purchased, they are deposited into the buyers’ Dmat account and if shares are sold, they are deducted from the Dmat account accordingly. Shares that are deposited or deducted from the Dmat account are electronic shares. For a person who wants to trade shares, it is mandatory to trade only Dmat (dematerialized) shares. Physical shares cannot be traded. Dmat actions have many advantages in terms of ease of handling, etc.
A Dmat account can be opened through most banks and financial institutions, after completing the required forms and providing proof of identity and address. The usual charges associated with a Dmat account are:
1. Account opening fees
2. Annual fees for maintenance of the Dmat account
3. Periodic recurring charges for holding shares in the Dmat account
4. Other charges for services depending on the transactions made. There are usually no transaction/service fees when purchasing shares. The charges will be leveraged when the shares are sold.
The above charges may not be the same between different service providers, but a large part is likely to be the same as regulatory agencies like the Securities and Exchange Board of India (SEBI) specify certain standards.
trading account
A trading account is required if a person wishes to trade i.e. buy and sell shares on the stock exchange. The 2 major stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). A business account can also be opened with most banks and financial institutions, after completing the required forms and providing proof of identity and address. Actual trading can be done over the phone, the Internet, or using the transaction vouchers that are provided at the time of account opening. Personally, I have found buying and selling over the Internet to be quite convenient. There are options to specify the price at which to buy or sell and it is easy to track the status online.
There is a brokerage fee that is incurred for both buying and selling shares. This charge varies between different business houses. In addition, government taxes such as the Securities Transaction Tax (STT) will be incurred on such transactions.
Bank account
It goes without saying that a bank account is required to carry out various financial transactions associated with stock trading. This is where the money from the sale of shares will be credited or the money from the purchase of shares will be debited. A normal Savings Account is sufficient and nothing additional needs to be done with the Bank account.
Negotiation process
Once the Dmat account, trading account, and bank account are in place, a person is ready to start trading. While it is not necessary to have the Dmat account, the trading account and the bank account with the same organization, I believe that having it with the same organization offers additional convenience, especially for people who trade over the Internet. The following example of buying and selling using a business account on the Internet illustrates the convenience of having the Dmat account, business account, and bank account with the same organization.
Purchase of shares: When a person wants to buy a share, he logs into the trading account and specifies the details such as company name, no. of shares to buy and the price at which to buy. Depending on this information, the required amount from the bank account is reserved for this operation. When the desired price is reached, this trade is executed and the amount (after adjusting the charges) is debited from the bank account and the shares are credited to the Dmat account.
If the bank account had been with a different organization, then in order to perform this operation, it would have been necessary to transfer the amount to the business account.
Sale of shares: When a person wants to sell a share, he logs into the trading account and specifies the details such as company name, no. of shares to sell and the price at which to sell. Depending on this information, the required number of shares of the Dmat account is reserved for this operation. When the desired price is reached, this trade is executed and the shares are debited from the Dmat account and the amount (after adjusting the charges) is credited to the bank account.
If the bank account had been in a different organization, after this operation, it would have been necessary to move the amount from the business account to the bank account.
Please note that in addition to the fees charged by the bank, Dmat account service provider and merchant account service provider, there will be additional government taxes such as STT and service tax. Also, be sure to read all of the service providers’ terms and fee details before opening any account and be aware of the transaction costs involved with each transaction. Happy trading!