The first step toward an individual’s entry into the market is to open a trading account. Be it equity or derivatives, usually an individual opens a trading account by linking a demat account. A lot of importance individuals give to choosing a broker with low brokerage and how to execute a trade, but they do not give much attention to maintaining records. It is important for the investor to keep their records precisely from the time they open a trading account to be compliant with the law, monitor finances, and make the right decisions.
Basics: Trading and Demat Accounts
Keeping a basic understanding of record keeping involves examining the rudimentary structure of market participation. An investor uses a trading account to buy and sell securities on the stock exchange, while a demat account refers to an account that electronically holds securities in dematerialized form. These two accounts interact hand-in-hand: when an investor purchases shares, he executes the trade through the trading account while the securities remain in the demat account.
Reasons for Record Keeping
Regulatory Compliance
The stock market is a regulated market operated by SEBI (Securities and Exchange Board of India). If required, traders and investors must retain their records of transactions, which mainly consist of contract notes, trade confirmations, holding statements, etc. In short, having all the documentation enables them to assure the authorities that they comply with tax laws and all others whenever such a need arises.
Tax Filing and Readiness for Audit
Individuals must report gains/losses on every trading activity on their tax returns during the period of tax filing. Short-term capital gains tax is calculated on the gain, which is the difference between the selling price and purchase price for a share. In the same way, long-term investments are taxed differently. It is almost impossible for them to get this calculation right without maintaining thorough records.
Performance Tracking
Record keeping facilitates tracking the performance of portfolios and investors over time. By going back and evaluating trades that they have closed, buying or selling habits come into focus, as do strategies that worked or did not work, allowing for informed choices to be made based on the trade history. Trading history also shows how often an individual trades, which impacts the overall trading returns.
Disputes
Records serve as evidence if any conflicts arise between the brokerage statement and the actual transaction. Errors like incorrect charges or missing trades, or those executed differently, can occur. The presence of contract notes and transaction histories allows for a simpler conversation with brokers and ensures quick resolution of disputes.
Capital Allocation and Risk Management
Investors frequently disperse capital across myriad asset classes and instruments. Record keeping provides a window through which they may clearly see how funds get distributed and where they may have to rebalance the portfolio. In other words, records are also priceless for risk assessment: they self-identify levels of exposure to various sectors, instruments, or trading strategies.
Record-Keeping Methodology
- Organizing according to dates and types: Have separate folders for contract notes, demat statements, and broker bills.
- Diving into the digital: Many platforms provide transaction data in exportable formats of PDF or Excel. Cloud storage allows individuals to access and be free from the risk of data loss.
- Regular auditing: Set up monthly or quarterly reminders to take some time to go through and reconcile trading activity with the brokers’ statements.
- Backing up sensitive data: Keeping copies of essential financial documents safe is advisable. Individuals may consider using something like an encrypted storage solution.
- Noting trade rationale: Besides simply recording transactions, supporting them with a note about the reasoning behind the trade goes a long way toward shedding light on actions when individuals review them later.
Record Keeping and Low Brokerage Accounts
Investors obtaining a demat account with low brokerage benefit from less expense, but this should not come at the cost of record-keeping. Digital platforms have ensured access to all historical data, but a clogged record-keeping process may spell doom if the broker discontinues service or their account is migrated. Thus, personal record keeping becomes indispensable. Also, low brokerage accounts usually accommodate high-frequency traders. For that matter, these traders’ volumes of transactions can increase almost immediately, making record-keeping indispensable.
Conclusion
Initiating an account within a trading environment and linking it with a demat account is an essential first step in trading. Individuals should select a demat account based on low brokerage fees, as this will definitely reduce their brokerage costs; however, they must stay equally committed to maintaining a constant record of their activities.
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