Explained: Should you have separate accounts for investing and trading?

• Having separate accounts help in isolating long-term investments from short-term trading for better risk control.
  
• It helps to simplify tax reporting and benefit from potential tax-saving strategies.
  
• While having two separate accounts for trading and investing is advisable, it is not recommended to have multiple demat accounts.
  

Investing and trading both involve buying and selling stocks but they could not be more different from each other. While investing focuses on holding assets for the long term, aiming for capital appreciation and income, based on fundamental analysis and a buy-and-hold strategy, trading involves frequent buying and selling of assets to profit from short-term price fluctuations, often relying on technical calls.

“Trading is like flying over treetops, where one must constantly remain attentive, whereas investing is like flying above 40,000 feet,” says Aamar Deo Singh, Head Advisory, Angel One. In fact trading requires significantly more time, dedication, and an active approach compared to investing. Traders often monitor markets closely, execute quick decisions, and may engage in day-to-day trading activities, while investors typically take a longer-term, hands-off approach to their portfolios.

Whether you are investing or trading, if you own any stocks, mutual fund shares, or exchange-traded funds (ETFs) in your portfolio, you must have a demat account. Plus to buy and sell securities, you need a trading account both when you are investing and trading. Brokerages provide 2-in-1 accounts where there is both a demat account and a trading account to invest or trade as the need may be.

Here we answer the question- do you need separate accounts for trading and investing?

Separate accounts for investing and trading

No, you don't need separate accounts for investing and trading, rather, it is not mandatory. “However, some traders prefer to keep separate accounts to clearly distinguish their long-term investments from their more active trading activities for better portfolio management and tax purposes. It ultimately depends on your personal financial strategy and preferences,” says Yash Upadhyay, chief strategy officer, 5paisa.com.

Argues Chintan Kotak, senior, director, IIFL Securities, “It’s always advisable to have separate accounts for investing and trading since you can track them separately, since the objective of both the accounts is different.”

Advantages of having separate accounts for investing and trading

Maintaining distinct accounts for trading and investing offers the following advantages:

Clearly distinguishable accounts

First, it enables the assessment of each account's performance in isolation by isolating long-term investments from short-term trading for better risk control. “For example, you don’t want a situation where you end up holding a trading stock which was bought with a short term view to stay in your investment/ long term portfolio just because the stock price went down from your purchase price and you missed out on booking losses,” says Kotak.

Having separate accounts helps in maintaining a clear portfolio overview and simplify decision making. “Having separate investing and trading accounts helps customise strategies for specific goals in each account and simplify tax reporting and benefit from potential tax-saving strategies,” says Upadhyay.

Cut out the stress

The presence of separate accounts brings peace of mind. Despite short-term market volatility, your long-term investment portfolio remains less susceptible to anxiety.

One can keep track of the trading account on a regular basis while the investment account can be looked at once every quarter or so. “In order to be effectively diversified, your trading account shouldn't make up more than 10%–15% of your entire long-term portfolio,” says Singh.

On the flip side, this brings additional paperwork and maintenance and one has to bear the charges for both the accounts.

What to keep in mind

It's essential to guarantee that a family member, preferably your spouse or children, is well-informed about these accounts and their holdings in case of any eventuality. Additionally, it's advisable to designate a nominee for these accounts.

While having two separate accounts for trading and investing is advisable, it is not recommended to have multiple demat accounts. It would mean remembering multiple passwords and may result in higher costs due to additional account maintenance fees, brokerage commissions, and other associated charges. It may also lead to confusion and mixing up of trading and investing strategies.