A trading account has become a crucial tool for investing in stock markets. Having a trading account makes the entire process of trading fast and secure. In this article, let’s discuss the purpose of trading accounts.
What is a trading account?
A trading account is essential to enter the world of the stock market. Investors buy or sell equity shares through the trading account.
Before trading accounts were introduced, the traders used hand signals and verbal communication to convey their buying or selling decisions. After the stock market adopted the electronic system, the traders don’t have to be physically present at the stock exchange to place orders.
With the help of a registered stockbroker, the traders can open a free trading account. The stockbroker conducts the trading on your behalf. Each trading account has a unique trading ID that is used to perform online transactions.
How does a trading account work?
A trading account acts as a link between a Demat account and a bank account. When traders desire to buy shares, they place an order through their free trading account. The transaction goes for processing in the stock exchange. When the order is executed, the required number of shares gets credited into the Demat account and a proportionate sum gets deducted from the bank account.
To sell equity shares, a similar process is followed. The investor places a sale order for a certain amount of shares with the help of the trading account. The said transaction goes for processing in the relevant stock exchange. Upon execution, the required number of shares is debited from his Demat account, and a proportionate sum gets credited to his bank account.
The purpose of a trading account:
The purpose of a trading account could focus on short-term trading, long-term stocks, or handling investments for savings.
Short-term trading:
The stock market becomes volatile in uncertain situations. Say there is news of sudden changes in the economy, it creates a quick up and down in the prices. If you trade regularly, you can profit from this by trading stocks that show sharp short-term price gains. But you have to remember the opposite can happen too. When the stock takes a downward turn, you might lose your money.
Long-term trading:
Long-term investments help you build wealth over a period of years. Prices on investments rise and fall, but you can gain over the long term when your portfolio is balanced well. Several long-term traders benefit from mutual funds with diversified stocks and bonds that cover a range of industries and sectors.
Goal shifts:
Your goals for a trading account may change over the years. As a young trader, you have the time and energy to make up for the losses. Because bonds have more security and low-risk rate than stocks. For example, in your 20s, you can invest 70% in stocks and 30% in bonds. In your 40s, that can change to 60% in stocks and 40% in bonds. And in the near retirement, you can switch to 70% in bonds and 30% in stocks for more security.
Gaining expertise:
The purpose of your trading account depends on your knowledge and your age. Initially, a stockbroker can assist you in investments. But you will do more as you learn the basics, such as stock analysis, understanding how the economic changes affect the stock market and finding reliable resources for investing.
Many online trading websites offer free online trading accounts that let you make your own trades. The free trading accounts provide flexibility, one-point access, and seamless transactions for traders.