Money Tree

In my previous article in this series we had learnt to prepare ourselves mentally to get into the markets and learnt some basic exercise before actually jumping into the markets. In this article we shall try to cover practical aspects of investing like opening of various accounts and understanding basic concepts of trading.

Opening a demat account

The first step towards investing in stock markets is to open a demat account. A demat account is opened with a depository participant, which may be a stock broker, a Bank or a financial intermediary. To open a demat account you need to fill up a securities account opening form together with an agreement with the Depository Participant. Following documents should be enclosed with the form.
A passport size color photograph.
A copy of the PAN card.
An address proof. (copy of Passport, Driving License, Ration card, Election identity card, etc.)
Proof of Bank account (a cancelled cheque or bank statement can be given)
A passport size color photograph of the nominee (if appointed)

Once these documents are submitted together with duly filled up account opening form, your demat account will be opened in a week’s time and you will receive a booklet containing instruction slips and your beneficiary account number. A DP ID number will also be printed on the delivery instruction booklet which is the unique identity number of your Depository Participant. These delivery instruction slips are used to transfer shares from your account to another account. You will need these when you sell shares through your broker or when you want to transfer shares to some other person.

Charges for opening a demat account

There are two types of charges on your demat account. One, annual maintenance charges and two, transaction based charges. Annual charges range from Rs. 100 per annum to Rs. 500 per annum for most of the Depository Particiapants and transaction charges vary from 0.01 percent to 0.05 percent of the transaction value, some Depository Participants, mostly brokers, charge flat transaction charges like Rs. 10 or Rs. 30 per transaction slip irrespective of the value of trade. Some brokers have come out with a lifetime free demat account where you do not need to pay for annual account maintenance charges.

How to choose the right Depository Participant?

As far as cost aspect is concerned a demat account with a broker is much more economical than a demat account with a bank. For example, you sell 1000 shares at the rate of Rs. 500 per share then, in case of your account with a broker, the broking house would charge you Rs. 25 for executing your instruction slip and in case of a Bank they may charge you Rs. 200 (i.e.0.04 percent of transaction value of Rs. 5,00,000/-). One more benefit of having a demat account with your broker is that you may authorize your broker through a Power of Attorney to automatically debit your demat account with him whenever you sell stocks from your holdings in that account, this saves you from the hassles of filling up and depositing delivery instruction slips with the DP in a very short time. I would recommend to have a demat account with the same broker where you have a trading account. Still, if you feel more secure with a bank to have your demat account then it should be with a bank which is most convenient when it comes to deposit delivery instruction slips.

Choosing a stock broker and opening a trading account

The regular traders and experienced investors look at the lowest brokerage and highest margin while choosing a stock broker. But for the first time investors, brokerage rates should be secondary and they should look at the research and analysis provided by the broker. A good brokerage has a system whereby you get an access to their research team and research reports released by them and a relationship manager is always accessible for your general queries and help. The brokerage should not be a deciding factor as initially your volume will not be very high and once you get expertise in trading, you can shift to a low brokerage broking house. Opening of trading account is almost similar to opening of a demat account. You will need to fill up an account opening form along with agreement with the Broker together with the following documents.

A passport size color photograph.
A copy of the PAN card.
An address proof. (copy of Passport, Driving License, Ration card, Election identity card, etc.)
Proof of Bank account (a cancelled cheque or bank statement can be given)
Proof of demat account
A passport size color photograph of the nominee (if appointed)

Internet trading

Internet trading is getting popular for the convenience of trading stock markets without going anywhere. ICICI Direct, Sharekhan and many other brokerages are providing services of internet trading through their websites. In an internet trading account your Bank account, your demat account and your trading account are linked with one another and you can transfer funds from your bank account and buy shares through your online trading account and you can check the status of your holdings online in your demat account and when you sell the shares through your trading account your demat account is debited by the same quantity and the amount realized is shown as a credit balance in your trading account which can be transferred into your bank account or can be used for further buying.

However, there are certain disadvantages of having an internet trading account.
The online trading companies would not give you any margin and you will have to transfer entire amount before buying any stock whereas in offline trading brokers generally keep only 20 percent margin and rest can be paid when you buy the shares. The brokerage charged by the internet trading websites is generally higher than that charged by the brokers offering offline trading. The biggest disadvantage is the time lag of prices, you would not get live quotes in an online trading account and in stock markets even seconds would matter, you would want to have the live prices to initiate a trade. It depends on the speed of the ISP you are using and the type of connection and if your connection is slow the time lag could range from 2 to 5 minutes.

Now after opening demat and trading accounts you are ready to do your first trade. Do your own research, have a word of advice from your broker and tread forward into the world of financial markets. Happy investing.