In my earlier post, I explained you about what are Demat account and Trading Account, what is a difference between them and how both are necessary for investment in the stock market. In this post, I try to explain you about how to choose best Demat Account and Trading Account in Indian Stock Market.
Below points are very much necessary before you proceed for stock trading.
1) Never follow brokers who appear on TV or print media-It is strict no when you decide to trade or invest in the stock market. These experts usually are the brokers, who never tell you to STAY AWAY from the market. However, they always insist you to trade. Sometimes they suggest you to buy and sometimes short sell. In the end, the result will be more trading means more earning for these brokers. Velocity or frequency of trade earns broker. However, it diminishes your chance to create wealth. Hence, adopt a strategy which best suits you.
2) Never pay for packages to get HOT TIPS-There are many firms which offer such services. They lure you by sending few messages and make you believe that their tips actually work well. However, if they are so experts then they may be richest on this earth. Their motive is not to make you rich, but to earn money by selling packages.
3) Volatility is inherent-Whether you buy Infosys or any cheap stocks, volatility is always there. Therefore, be ready to adjust your mind to this volatility. You must have guts to bear this volatility risk. Your broker suggests you the target price of 20% or 30% in a day or two. However, he never suggests you the negative return of 20% to 30% also possible.
4) There is no such theory or algorithm, which is perfect-You find many theories and algorithm, which these experts show you while trading. However, mind it, none of them are perfect. They may provide you the hint, but not surety. Hence, adopt your own theory or algorithm, which works for you.
5) Trading makes you mad-Yes, after a few days of trade you start to watch business channels eagerly and at the same time waits for market opening at 9 AM. Holidays to market will be a frustration for you. Hence, trying to control your emotions is very much important than executing the orders of buy/sell. Controlling your behavior is more important.
6) Stay away from Margin Trading-Initially you buy the stocks equal to amount available in your trading account. However, after a few days of trading, you start to explore new ideas to make easy money in a short span. Do remember that, margin trading need a strong heart to bear losses. It is good when the trade ends in positive. It is a disaster if it reverses your position. Your broker insists you to go for margin trading. However, he never tells you that in case of short of the margin he sells your stocks without any second look.
7) Manage a Dairy-Before proceeding trading, first have a habit of managing dairy. Before going to buy and sell, make it a habit to note why you want to buy/sell a particular stock. After a few days, you look back then you notice the mistakes you did in that trade.
Now, let us look at how to choose best Demat and the trading account for you?
1) The cost of trade or brokerage-This is the competitive world. Hence, there are brokers who lined up to provide you damn cheap broking cost. You have to decide whether you want to open this account for a trading purpose or investment purpose. If it is trading purpose, then bargain with a broker. However, if you are an investor then I think no broker will reduce brokerage. Because, brokers earn from your frequency of trade. In delivery based trading, the frequency of trade will be lower.
There are mainly two types of trading.
- Intraday Trading-In such types of trading, you buy stocks and sell them on the same day. This is also called as Day Trading. In such trading, you don’t pay the full value of what you buy. However, some % of the value you bought will be deducted from your account. For example, if you buy XYZ company stock of 100 quantities for Rs.10 each then the total value will be Rs.1, 000. However, you will not pay the full Rs.1, 000, instead you pay some % of this Rs.1, 000 (Usually, stock exchanges of brokers fix this.). The profit or loss will be on 100 quantities. However, if buy/sell stocks then you have to sell/buy on the same day within a market closure. Otherwise, your broker sell/buy before the market closes.
- Delivery Based Trading-You buy stocks by paying the value of your buy. For example, if you buy XYZ company stock of 100 quantities for Rs.10 each then the total value will be Rs.1, 000. You pay full Rs.1, 000 and buy the stocks. Such stocks will be available in your Demat Account. Such stocks will be delivered to you within 2-3 days of buying. You have the option to sell such stocks at any day or keep them for life long.
Usually, first-year brokers will not charge you on Demat account. This they call it a FREE ACCOUNT. However, later on there will be yearly charges. Hence, check the yearly Demat account charges at first. In my view, there will not be so big changes in this charge. This is also called yearly maintenance charge.
Apart from this, the broker charges you on each buy/sell and delivery of stocks. This buy/sell brokerage ranges from 1% to 0.01%. Check whether this charge applies to both side or one side (i.e. Charges while buying and selling or only while buying). Few brokers offer a fixed amount like Rs.20 per trade (irrespective of volume). So check the percentage of brokerage and the applicable minimum brokerage in Rs. You have to concentrate on these expenses if you are an intraday trader. If you buy stocks for delivery based (holding stocks in Demat Account), then brokers charge on such delivery of stocks. This again ranges from 1% to 0.25%. Usually, delivery based charges will be higher than the first said Intraday charges.
Therefore, you must concentrate on yearly Demat Charges, Intraday charges (whether applied to ONLY buying or for buying and selling) and delivery based charges. There is no strict rule that each broking firm must provide this much of minimum brokerage. Hence, they act in a competitive mind. Better to bargain for it.
2) Software and ease of use-This is the second point, which you have to look for. Usually, all brokers have their own inbuilt software, which you can download it. However, you must check some reviews to know more about this. Along with that, check their web-based application. Ease of use is very much important to understand and act immediately in day trading.
3) Day trading Square off Timing-When you do intraday trading, then at the end of a day you have to square off the position. If not, then the broker initiates himself. Hence, check the timing of such initiation. It is usually before few hours of market closure. Therefore, check whether positions will be squaring off at 2.45 or at 3.15.
4) The reputation of the broker-There are so many brokers in India. Also, due to huge competition, they offer you very cheap brokerage. But they may act against a law or may indulge in some unlawful activities. Hence, select a broker who has a good reputation in the market. Never run behind a cheap broking firm.
5) Service–When you need some help in placing orders or some other activities like a change of bank, address, or nominees, then you need the help of brokers. Hence, check for their service. How quickly they respond to you and resolve the issues. I know many brokers, who, after opening account never look at you when it comes to clarification of issues.
Apart from these types of brokers, Banks nowadays offer you 3-in-1 account. Your banker offers you savings account, Demat Account, and trading account in one place. This is more convenient as you can manage all your trading activities in one place only. Usually, brokers offer you trading and Demat accounts, but not a bank account.
Advantages of 3-in-1 Accounts–
- It is easy for you to manage your trading, Demat and bank account all at one place. Hence, it is convenient to manage.
- Usually, nowadays banks offer you many types of investment avenues like stocks, bonds, FDs, mutual funds and many more. In such a situation, you find it easy to manage at one place.
- No irregularities with your trading or Demat account. Whereas, brokers can manipulate your account.
- It is best to have a 3-in-1 account for long-term holding of stocks and one more trading and Demat account with a broker for a trading purpose. Hence, one account with Bank for long term investment and for trading an account with a broker.
Disadvantages of 3-in-1 Accounts–
- Charges usually at the higher end.
- They may insist you to manage a minimum balance in a savings account. This is not the case with a broker.
- Usually, account opening will not be free.
A few points to caution you about Demat and trading accounts-
1) Whenever you receive the statement, please make it a habit to check it for transactions done.
2) Never keep your account idle. Freeze it, if you feel not operate for next 4-5 months or more.
3) Monitor your holdings regularly.
4) Never share your user name and password of your trading/Demat account with others.
5) Finally, I am a fan of EQUITY INVESTMENT but not TRADING. So I suggest you to go for INVESTING but not TRADING.