Discussion Topic: Trading Account vs Demat Account
Today we are going to discuss about Trading Account and Demat account. Here we will provide details on: What is Trading Account? What is Demat Account? And the difference between Trading Account and Demat Account. You will also find a detailed comparison chart between Demat Account and Trading Account.
The Basic Concept: Trading Account and Demat Account
Recently I got interacted with a new investor who was very much anxious to start trading in stock Market. However, the difference between Trading Account and Demat Account was very much unclear to him.
As per my past experience, this is not just an isolated case of a single investor, but the meaning and difference between Demat Account and Trading Account is still unclear to many of us. Hence, I thought to write a post to properly explain you the meaning and the difference between Demat and Trading account.
To the very basic, Dematerialization of stocks/commodities is nothing but a way of paperless trading. In India, it has been introduced in a few years ago (Around the Year 1996). In this changeover, the physical certificates are transformed into an equivalent amount of electronic certificate. To store those electronic certificates the Demat account is used.
Many people often misunderstood the Demat account with a trading account which acts as an intermediary between your Demat account, saving bank account and the stock market. Refer to the below image for an understanding of how the trading account, demat account, and the stock market interconnect each other.
To make an investment in securities in a stock exchange, you must first comply with certain norms. One such prerequisite is that an investor must have a demat account and a trading account. Hence, before taking your first step into the stock market you must clearly know the difference between Trading and Demat Account.
What is Demat Account?
Demat is the short form of Dematerialization, which refers to a process of issuing stock certificates in electronic/digital format. And the Demat account is where these digital stock certificates are securely stored.
It is very similar to a bank locker which you use to store your valuable assets. The only difference is that it holds your digital stock certificates.
According to Depository Act (1996), Securities and Exchange Board of India (SEBI) has made it compulsory for the investors to have a Demat Account. It is a mandatory requirement before you can actually make transactions in the stock market. So, your stock broker will automatically open a demat account whenever you register with them.
In India, you can open a demat account with either CDSL or NSDL, but through your broker. They are the only government approved depository services in India. If you want to know more about them then check our guide on NSDL vs CDSL: What’s the difference? Which one is better?
There are several benefits of having a Demat account, some of them are:
- Immediate credit of the bonus/right issue to the shareholder’s demat account.
- Decrease the Risk of loss, forgery or theft.
- Lower transaction cost.
- No stamp duty has to be paid.
What is Trading Account?
In stock trading, the term trading account refers to an account through which an investor can buy and sell securities. The trading account acts as a connector between you, your bank account, your demat account, and the stock market. This is used solely for the purpose of trading.
Let’s now understand, how all of these interconnects: Suppose you have shares of "Company X" in your demat account, and you want to buy stock of "Company Y". To do this, you first need to transfer adequate money from your saving bank account to your trading account. Now, you can buy shares of Company Y from the stock market. After you purchase shares of Company Y, those shares will then be deposited directly to your demat account (which is linked to your trading account).
Likewise, if you wish to sell the stock of Company X from your demat account then you have to place a sell order from your trading account. After you place the sell order, the shares would be deducted from your demat account and the sell value you earned will be deposited into your trading account. Later, you can transfer that money to your bank account.
[See Also: Our guide on How to start trading in India with Trading and Demat Account]
Can You Open a Demat Account without a Trading Account?
Yes, that is absolutely possible. If you are new to trading and apply for an IPO, then you will only require a demat account to hold those shares after allotment.
If you only intend to hold those IPO shares and do not want to sell them, then opening a demat account will be sufficient. But, if you want to sell those shares then you will have to first open a trading account.
Only after your trading account is activated and linked to your demat account, you can sell those IPO shares in the secondary market.
To know more see our guide on How to buy IPO Stock? How to Apply for IPO Online?
Difference Between Demat Account and Trading Account
Below table briefly describes the difference between the trading account and demat account. An in-depth analysis between trading account vs demat account:
|COMPARISON||DEMAT ACCOUNT||TRADING ACCOUNT|
|Working||A Demat account that allows the investors to hold shares and securities in an electronic form.||A Trading account is through which the account holder places an order for trading in securities is Trading Account.|
|Approvals||Approval of SEBI (Securities Exchange Board of India), NSDL (National Securities Depositories Limited), or CDSL (Central Depository Services Ltd) is required is required to open a Demat Account.||For Opening Trading Account no approvals are needed. Hence, it takes less amount of time than opening a demat account.|
|Transaction Type||The Demat account acts like a bank locker, where the securities bought are stored and securities sold are withdrawn.||The trading account is used for placing buy or sell order in the secondary market.|
|Annual Charges||After a Demat account is opened, the account holder has to pay an Annual Maintenance Charge (AMC) depending on the stockbroker he is registered to. A Major portion of this AMC includes depository charges.||There is no mandatory charge for trading account. For that reason, many brokers don’t charge any maintenance fee on trading account.|
|Utilization||A Demat account is mostly utilized by those investors who invest in the financial market and keep possession of securities more than a day.||Trading account is mostly utilized by traders who make frequent transaction in stock market but don't hold securities for more than one trading day.|
|Maintenance||Demat Account is maintained by NSDL or CDSL.||Trading Account is maintained by your broker.|
The Final Thoughts and Conclusion:
As a final roundup, a demat account is an account that is used for holding securities in non-physical form (digital form), whereas a trading account acts as the central coordination point for buying and selling securities.
In case of a purchase transaction, the trading account takes money from your bank's saving account, buys stocks and transfers them to your demat account. Similarly, while selling stocks, the trading account withdraws shares from your demat account, sells those shares and transfer the earned money to your savings account.
[Check our guide on different Buy/Sell Order types used in the stock market]
We hope that you have enjoyed the above article describing the difference between Trading and Demat Account. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions about the trading account, demat account, and the difference between demat account and trading account. Also, let us know which broker you have registered your demat and trading accounts.