For IT professionals, there is no better way of participating in the stock market than by starting an online trading account. Most IT professionals are, however, unaware of the nuances of investments in shares. This series is intended to bridge that gap.
Anyone wishing to start an online account will be surprised that they have to sign at around 30 places to start the account. Why? Because an online account consists of three accounts – your bank account, demat account and the trading account. Don’t worry – we will explain it below:
- Bank Account – This is your normal savings account.
- Demat Account – A demat (dematerialized = no material[physical] document) account is maintained by a Depository Participant, fondly called DP. It acts as a intermediary between the investor and the company (in which the investor is buying/selling) and carries out the transaction between them. It keeps record of all transactions and also the balance of the shares of an investor with each company. More importantly, every transaction is required by law to be submitted by the DP to government-backed institutions (NSDL or CSDL); so every investor is protected (also tracked 😉 by the Government.
- Trading Account – Indian laws doesn’t allow any online market transaction without a digital signature. So the investor gives a Power of Attorney (PoA) to his trading account company. (It is this PoA which makes you sign so many papers, and enables the trading account to carry out transactions using your money). The trading accounts have their own infrastructure to carry out secure digital transactions. The trading account company informs the DP of the intention of the investor to buy or sell and settles the deal. Note that offline transactions can be done between DP and the investor themselves, it is to enable online transactions that trading account is required.
When you see an ad like ICICI Direct,understand that it consists of three accounts – trading account (ICICI Direct), demat account (ICICI Demat) and SB account (ICICI Bank). Institutions like SBI and HDFC also have such three-in-one accounts under them. Some like Geojit and Sharekhan do not have banking licenses, so you also need to have another bank account. In this case, you also may have to bear with a delay of a couple of days for money to arrive in your bank account when you sell. However, when you buy, money goes away from your bank account in minutes! Universal law of finance – big money always attracts small money.
Now that you understand the online trading account, in the next issue, we will deal with the real thing – the stock market.