Difference between demat account and trading account

Are you considering to invest (or trade) in the stock market? If you’ve been following our guides, you might know that a demat account and a trading account are essential for trading and investing in securities. A common issue however, is the average investor does not realise exactly what the differences between a demat and a trading account are.

Key Points:

  1. A demat account is where you store your shares, bonds, government securities and mutual funds in electronic format.
  2. A trading account facilitates transactions of the shares, bonds, government securities and mutual funds that you hold in your demat account.
  3. A trading account is a bridge between your bank account and your demat account. You can transfer funds from your bank account to demat account and conduct transactions through a trading account.

What is a Demat Account?

A demat account is an account to store your shares, bonds, government securities and mutual funds in electronic form. A demat account is opened with a Depository Participant (or a brokerage firm that provides both trading and depository participant services). According to Depository Act of 1996 by SEBI, it is a mandatory for all investors to have a demat account.

What is a trading account?

A trading account is, in simple terms – a platform to facilitate transactions in shares/securities/stocks for investors . It is your key to participation in the securities markets. Opening a trading account with a broker requires you to have an existing demat account – which is why many brokerage firms open both accounts together.
Learn about the demat account opening procedure and trading account opening procedure.

Demat Account vs. Trading Account

Now, let us note down some points that bring out the major differences between a trading and a demat account.

Nature of the Accounts

A demat account holds shares, bonds, government securities and mutual funds in electronic form. The financial instruments that are held in a demat account are traded in the stock market with the help of a trading account.

Here’s a real world analogy: Imagine you have a thousand rupees in your wallet (i.e. trading account) You walk into a departmental store (i.e. the share market). You purchase several items and finalize the price. You then pay the due amount already existing in your wallet. In this case, your wallet, is the trading account since it was the source of funds for the transaction. Your shopping bag is the demat account since it now holds the assets you purchased.

Compliance

To open a demat account or even a trading account, you need to approach a SEBI approved broker and a Depository Participant (broker) registered with the NSDL or CDSL. In case of a trading account, such approvals is not required. But the number of demat or trading accounts that a person can possess is not limited – although there is no point having multiple demat accounts. In fact, you cannot have more than one trading account with a brokerage since the accounts are uniquely linked to PAN cards.

Every DP has their own set brokerage charges. You should check all the charges and compliance certificates usually displayed on their website.

Function

The main function of a demat account is that of securities storage, but it also performs the function of re-materialization, that is the conversion of the shares from electronic to physical form. The task of selling and buying the stocks is the responsibility of the trading member, under instructions of the client or by client themselves. If a trader wants to trade in, say currency, only a trading account is required; but if a trader wishes to trade in stocks, both accounts are mandatory.

How does trading take place?

Once the process of opening both demat and trading account is complete, the question that arises is that how to trade with these accounts? Once a demat account is opened, the account holder receives a client ID and password to login to the trading portal using these credentials.

The trader needs to transfer money from his bank account to trading account. When stocks are purchased, they get added to the demat account and the amount that goes towards their purchase gets debited from the trading account. In case stocks are sold, they are debited from the demat account and the money is credited to the trading account.

Basically, a trading account acts as a link between a bank account and a demat account. Therefore, many banks have started offering three in one packaged accounts, where the holder will simultaneously get the benefits of a normal bank account, a trading account and a demat account. The charges levied on such packages are usually expensive. Which is why discount brokers such as Upstox have stepped in to fill in an increasingly common need for many investors – discounted brokerage charges!

Wrapping Up:

  • A trading account is a bridge between a bank account and a demat account.
  • A demat account holds securities whereas a trading account is required to conduct transactions of these securities.
  • A demat account also conducts the process of rematerialization as per the request of a trader.
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