Demat and trading accounts are fundamental requirements to operate in the stock market. They both have different purposes but they are also closely associated with each other. Let’s understand the difference between demat and trading account.
- Purpose
A demat account is used to hold securities such as shares, bonds, mutual funds and exchange-traded funds in an electronic format. It serves as a digital repository to store these securities to prevent loss, damage, theft, or forgery. However, it doesn’t allow any transactions unless you have a trading account.
A trading account is used to buy and sell securities electronically. It serves as an interface to do transactions in the stock market. You can check share prices and their movements in real time in your trading account. It is mandatory to have a trading account to do transactions.
- Functionality
When you buy shares through a trading account, money is debited from your bank account and shares are credited to demat account. Similarly, when you sell shares through a trading account, they get debited from demat account, and money is credited to your bank account. A trading account is a link between your demat account and bank account.
- IPO Factor
When you want to invest in an Initial Public Offering (IPO) of any company, it is mandatory to have a demat account for the allotment of shares. It is not necessary to open a trading account. However, if you want to sell IPO shares or trade them in the market, you will need a trading account to place the order and book a loss or profit.
- Tracking
A demat account keeps a track of all your asset holdings. A trading account keeps a track of your transactions such as buying, selling, deposits, and withdrawals.
- SEBI Regulation
Both demat and trading accounts are regulated by the Securities and Exchange Board of India (SEBI).
You can open a demat account through a depository participant registered with the depository. A depository participant is an agent or firm which can hold your securities in a demat form. A depository is a central entity that holds securities in a demat firm. There are two depositories in the Indian stock market: National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL).
You can open a trading account with any registered stockbroker with SEBI.
Both demat and trading accounts will have unique identification numbers each.
- Charges
You have to pay account opening, annual maintenance, custodian/safety, transaction and other charges on demat account.
Trading account doesn’t attract any charge except the brokerage charge on the transactions.
Opening Demat and Trading Account
You can open online demat account and trading account with a SEBI-registered stock broker or firm. You can fill up an online form furnishing your personal details, submit KYC documents and go through the application verification process. Once your application is approved, you will get the account details with a unique identification number. However, you have to make sure that you link both demat and trading accounts so that you can easily operate and trade in the stock market.
Most stockbrokers offer both demat and trading account opening facilities for free. Make sure to choose a reliable and experienced stockbroker who can provide hassle-free services under one roof at affordable charges.
Conclusion
Demat and trading accounts are necessary prerequisites to commence your stock market trading journey. You can access them from anywhere, anytime, and on the go. While demat account enables you to ensure the safe storage of your securities in a digital format, a trading account makes it possible to buy and sell them easily. You can leverage both for trading in equity delivery, intraday, and derivative segment.
Read also: Basic tips for investing and trading on the stock market
