There are a few basic requirements that must be in place before an individual can begin the process of buying, holding and selling stocks. This document is a basic guide to explaining these requirements. Please note that this document does not provide advice on which stocks to buy or which investment strategy is suitable for an individual. This is a getting started guide for individuals based on my own experiences.
The 3 basic things needed to get started are:
* A trading account
* Bank account
A Dmat account is like a bank account, except that instead of cash, a Dmat account holds shares. Thus, if shares are bought, they are deposited in the buyer’s Dmat account and if shares are sold, they are reduced accordingly from the Dmat account. Shares that are deposited or reduced from the Dmat account are electronic shares. For an individual wishing to trade shares, it is mandatory to trade only Dmat (dematerialized) shares. Physical shares cannot be traded. Dmat coulters have many advantages in terms of ease of handling, etc.
A Dmat account can be opened at most banks and financial institutions, after completing the required forms and providing proof of identity and address. The usual fees associated with a Dmat account are:
1. Account opening fees
2. Annual Dmat account management fees
3. Recurring Periodic Charges for Holding Shares in the Dmat Account
4. Other service fees based on transactions made. Usually there are no transaction/service fees when buying shares. The fee will be deducted when the shares are sold.
The above fees may not be the same for different service providers but much of it is likely to be the same as regulatory bodies such as Securities and Exchange Board of India (SEBI) specify certain standards.
A trading account
A trading account is required if a person wants to trade i.e. buy and sell stocks on the stock exchange. The 2 main stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). A trading account can also be opened with most banks and financial institutions, after completing the required forms and providing proof of identity and address. The actual trading can be done over the phone, over the internet or using transaction slips provided at the time of account opening. Personally, I found it quite convenient to buy and sell on the Internet. There are options to specify the price at which to buy or sell and it’s easy to track the status online.
Brokerage fees are incurred for both buying and selling shares. This charge varies with different trading houses. In addition, government levies such as Securities Transaction Tax (STT) will be incurred on such transactions.
Needless to say, a bank account is required to perform various financial transactions associated with stock trading. This is where the money from the sale of shares will be credited or the money for the purchase of shares will be debited. A normal savings account is sufficient and nothing more needs to be done with the bank account.
Once the Dmat account, trading account, and bank account are in place, an individual is ready to start trading. Although 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 provides additional convenience, especially for individuals who trade via the Internet. The following example of buying and selling using an internet trading account illustrates the convenience of having the Dmat account, trading account, and bank account with the same organization.
Buy shares: When an individual wishes 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. Based on this information, the required amount from the bank account is set aside for this transaction. When the desired price is reached, this transaction is executed and the amount (after adjusting the fees) is debited from the bank account and the shares are credited to the Dmat account.
If the bank account had been with another organization, then to complete this transaction it would have been necessary to transfer the amount to the trading account.
Sell Stocks: When an individual wants to sell a stock, 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. Based on this information, the required number of shares in the Dmat account are set aside for this trade. When the desired price is reached, this transaction is executed and the shares are debited from the Dmat account and the amount (after adjusting the fees) is credited to the bank account.
If the bank account had been with another organization, after this transaction it would have been necessary to transfer the amount from the trading account to the bank account.
Please note that in addition to the fees levied by the Bank, Dmat Account Service Provider and Trading Account Service Provider, there will be additional government taxes such as STT and Service Tax. Also, be sure to read all terms and fee details of the service providers before opening an account and be aware of the transaction costs associated with each transaction. Good negotiation!