There are two types of accounts that are necessary in order to invest in shares. However, they have completely different functions. What is the difference between these accounts?
The difference between a demat account and a trading account is that a demat account is used to hold your investments and a trading account is used to conduct the transactions to buy and sell those investments. Understanding these two accounts is critical to starting your investment journey and in this beginner's guide we'll dive into what these accounts are, how they work, and how to use them to invest in the stock market.
What is a Demat Account?
A demat account, or dematerialised account, is an account that holds your shares and securities in an electronic form (also referred to as a digital form).
Prior to 1996, there were investors that had physical share certificates. These were cumbersome to deal with as they were susceptible to loss, difficult to manage, and there was a lot of paperwork required to handle. To address this issue, India established the dematerialisation system in order to allow shares to be held in a digital form. The demat account is essentially a huge digital locker that holds your investments.
What Securities Can You Keep In A Demat Account?
If you want to store Equity shares, Exchange Traded Funds (ETFs), Bonds, Government Securities, Mutual Funds, Debentures you can store them in a Demat Account. When you Buy Shares Your Shares Are Credited To Your Demat Account And When You Sell Shares, They Are Debited From Your Demat Account.
Example
If you buy 10 shares of a company, those shares will be stored in your Demat Account until you sell them.
What Is A Trading Account?
A Trading Account Is An Account That Is Used To Buy And Sell Shares In The Stock Market.
A Trading Account Acts As A Bridge Between Your Bank Account And The Stock Market. When You Buy And Sell Shares, You Do It Through The Trading Account And The Shares Are Purchased From The Stock Market.
When You Place A Trade, Your Order Is Sent To The Stock Market, A Transaction Is Made And Shares Are Taken From Your Demat Account (If You Purchased Shares) Store Your Shares (If You Sold Shares) And You Have To Have A Trading Account To Participate In The Market.
Functions Of A Trading Account
A Trading Account Is Used To Do The Following: Buy Shares Sell Shares Trade In Derivatives Purchased In An ETF Hold Market Buy Orders Most Of The Time Modern Brokers Offer Trading Accounts Through Apps Or Online.
Demat Account vs Trading Account: Key Differences
Understanding the difference between Demat and trading accounts becomes easier with a comparison.
| Feature | Demat Account | Trading Account |
|---|---|---|
| Purpose | Stores securities electronically | Used to buy and sell securities |
| Function | Acts like a digital locker | Acts like a transaction platform |
| Usage | Holds shares after purchase | Executes buy and sell orders |
| Required for | Holding investments | Trading in the market |
| Interaction | Connected to trading account | Connected to bank and demat account |
Simple Way to Understand
Look at it like online shopping.
Trading account = the site where you place an order
Demat account = the site where the order gets shipped from
Put the two together to complete an investment order.
How Demat and Trading Accounts Work Together
In the Indian stock market ecosystem, you need these three things.
Bank Account -> Holds your money
Trading Account -> Where you place buy or sell orders
Demat Account -> Where the shares you buy get stored
Example of a Transaction
Let’s break it down step by step.
Step 1: Place a buy order using your trading account.
Step 2: An amount gets deducted from your bank account.
Step 3: The trade goes through on the exchange.
Step 4: The shares get added to your Demat account.
When you sell shares.
Step 1: The shares get deducted from your Demat account.
Step 2: The shares get sold through your trading account.
Step 3: An amount gets added to your bank account.
Why You Need Both Accounts
When you want to invest in the Indian stock market, it’s safe to assume you’ll need a Demat account and a trading account.
Benefits of Having Both Accounts
1. Buying and Selling Shares
Market orders, including buying and selling, can be performed from a trading account.
2. Safe Storage of Investment
A Demat account provides a digital repository for your acquired securities.
3. Speedier Processing
The entire investment process is quick and efficient due to electronic systems.
4. Investment Transactions are Not Paper-Based
Say goodbye to paper share certificates.
Demat Accounts Available in India
Depending on the type of investor, different Demat accounts can be opened.
1. Regular Demat Account
This type of account is predominantly used by resident Indian investors.
2. Repatriable Demat Account
This account is for Non Resident Indians (NRIs) who intend to relocate funds overseas.
3. Non Repatriable Demat Account
This account is for NRIs who want to invest in the Indian markets but do not plan on relocating funds overseas.
Costs that Come with Demat and Trading Accounts
There are costs that are charged to keep the accounts, despite the ease of opening the accounts.
Types of Costs
Account Opening Costs
Certain brokers require a one-time fee to open an account.
Maintenance Charges (AMC)
Certain Demat accounts are charged a yearly maintenance fee.
Brokerage Fees
Trade execution may incur brokerage fees in trading accounts.
Transaction Charges
There can be certain charges when you buy or sell a security.
Brokers may have different pricing strategies, such as discount brokerage or zero brokerage.
Benefits of Having a Demat and Trading Account
Having both accounts can be beneficial to investors in several ways.
1. Safe Storage of Securities
There is no risk of losing physical certificates as they are all stored digitally.
2. Easy Management of Portfolios
All investments can be tracked from a single platform.
3. Faster Settlements
Most trades settle in T+1 or T+2 days.
4. Greater Accessibility
Buying and selling of shares can be done through a mobile app or a web platform.
Steps to Open a Demat and Trading Account
All the steps to Open a Demat account and Trading Account in India are digital.
Basic Steps
- Pick a registered stockbroker
- Fill the online application
- Complete the KYC process
- Upload the required documents
- Link your bank account
- Activate your Demat account and Trading account
The process may take a few hours to several days.
Common Mistakes Beginners Should Avoid
You may make be making mistakes, especially if you are inexperienced.
- Opening Accounts without Understanding Charges
- Always check the brokerage fees and the maintenance charges.
- Not Understanding the Difference
- Many beginners assume both accounts are the same, this leads to confusion.
- Disregarding Protective Steps
Generate strong passwords and use 2-factor authentication for added security.
The Bottom Line
For those entry to the stock market, it’s crucial to comprehend the nuances between a Demat and a trading account.
While the Demat account will keep your securities, the trading account will enable buying and selling of those securities. Both accounts, along with the bank account, will facilitate the stock market transactions.
For beginners, this understanding will mark the beginning of a well-organised investment journey in the Indian stock market.
Common Queries
1. Are Demat accounts available without trading accounts?
Yes, it is possible to maintain a Demat account with holdings and no trading activity. However, to buy or sell shares in the market, a trading account is needed.
2. Are stock investments possible without trading accounts?
Yes, a trading account is necessary to execute buy and sell transactions in the stock market.
3. Are multiple Demat accounts allowed for a single individual?
Yes, an investor is entitled to open multiple Demat accounts with different brokers, subject to certain regulations.
4. Do Demat and trading accounts get opened together?
Most brokers provide merged account opening, which means that both Demat and trading accounts get activated at the same time.
5. Is it safe to hold shares in a Demat account?
Yes, shares in a Demat account are kept in electronic form with depositories, which gives more safety and simplicity in handling them.
Disclaimer:
The information provided in this article is for educational purposes only and should not be considered financial or investment advice. Investors should conduct their own research before making any investment decisions.
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