The Difference Between Demat Account and Trading Account Explained
A trading account and a demat account are two types of investment accounts that serve different purposes. Simply put, a trading account acts as a store where you can buy or sell shares. Conversely, a demat account serves as a storage place for your shares. Therefore, understanding the difference between trading and demat accounts is crucial for you. Especially if you are looking to invest in the stock market.
In this article, we will explain the difference between trading account and demat account. Furthermore, we will explore why it is important for you to understand.
What is a Trading Account?
A trading account is a type of account that allows investors to buy and sell securities, such as stocks, bonds, mutual funds, and ETFs in the stock market. A registered stockbroker or brokerage firm opens it, serving as an intermediary between the investor and the stock exchange.
What are the Steps to Open A Trading Account?
Wondering how you can open a trading account? Let’s learn together.
- Choose a Stockbroker: The first step to open a trading account is to select a right stockbroker or brokerage firm. Consider factors such as brokerage fees, trading platform, research and analysis tools, customer service, etc.
- Fill the Account Opening Form: Once you have selected a stockbroker, you need to fill personal information, such as name, address, contact details, PAN number, bank account details, and proof of identity and address.
- Submit Necessary Documents: You will also need to submit certain documents to verify your identity and address, such as Aadhaar card, passport, driving license, voter ID, etc. You may also need to submit a cancelled cheque or bank statement as proof of bank account.
- Complete In-Person Verification: Some firms send their representative to your house along with the account opening form and the Know Your Client (KYC) form.
- Fund the Account: Once you open the account, you need to fund it to start trading.You can transfer funds from your bank account to the trading account using various payment modes, such as NEFT, RTGS, UPI, etc.
Voila! You are now ready to start trading in the stock market using your trading account.
What is a Demat Account?
A Demat account, also known as a “Dematerialized account,” is an electronic account. It links to an individual’s bank account and serves as a digital repository for holding securities. So, the Demat account automatically credits the securities when bought and debits them when sold.
How To Trade Using Demat Account?
To trade using a Demat account, investors need to follow the below steps:
- Open a Demat account with a registered depository participant (DP) and link it to their trading account.
- Choose a stockbroker who provides online trading services and has access to the stock exchange.
- Place an order to buy or sell securities through the online trading platform provided by the stockbroker.
- The stockbroker will execute the trade on behalf of the investor, and the Demat account will receive credits or debits accordingly for the securities.
- Investors can monitor their investments and transactions by logging into their Demat account and online trading platform.
Now that we know what is a demat and trading account, let’s explore their differences.
Difference Between Trading and Demat Account: Demat Account vs Trading Account
Let’s have a look at the key difference between trading and demat accounts.
| Feature | Trading | Demat Account |
|---|---|---|
| Purpose | Facilitates buying and selling of securities on a stock exchange | Holds securities in electronic form |
| Usage | Used to place orders for buying/selling of securities on a stock exchange | Used to store and track securities held in electronic format |
| Account Opening Process | Requires a broker or a stockbroker to open an account | Requires a Depository Participant (DP) to open an account |
| Nature of Holdings | Holds cash, stocks, derivatives, and other financial instruments | Holds securities in electronic format only |
| Transactions | Facilitates the transfer of securities between buyers and sellers | Facilitates the transfer of securities between a Demat account and a Trading account |
| Charges | Brokerage fees, transaction fees, and other related charges may apply | Account opening fees, annual maintenance fees, transaction fees, and other related charges may apply |
| Safety | No guarantee against loss of securities | Provides safety against theft, loss, or damage to physical securities |
Now that we have explored the key difference between demat and trading account- Demat vs Trading Account, let’s see how to choose between them.
How to Choose Between a Trading and Demat Account?
Choosing the right account that is suitable for your needs can be a little tricky but not when you’ve read the following factors. Thus, factors to consider when choosing between a trading account and a demat account are:
- Investment Objectives: If your primary objective is to buy and sell securities, then a trading account is more suitable. If your objective is to hold securities for the long term, then a Demat account is more appropriate. Objectives of Demat Accounts are naturally of this nature.
- Trading Frequency: If you trade frequently, a trading account is necessary to place orders quickly. If you invest in securities for the long term, then a Demat account is sufficient.
- Security Requirements: If you are concerned about the safety of your investments, a Demat account provides better protection against theft, loss, or damage to physical securities.
- Cost Considerations: Trading accounts typically have higher transaction fees and brokerage charges than Demat accounts. Therefore, the cost of trading should be a factor when choosing an account.
- Trading Platform: If you prefer to trade online, then you need to choose a broker that offers an online trading platform. Most trading accounts offer this feature, but some Demat accounts may not.
Buying Shares
When you buy shares in the stock market, your trading account and demat account work together to facilitate the transaction.
Your trading account is the platform through which you place buy or sell orders for shares. When you place an order to buy shares, your trading account sends the order to the stock exchange for execution.
Once your buy order is executed, the shares are credited to your demat account. A demat account is like a digital locker where your shares are stored in electronic form. When you buy shares, they are automatically debited from the seller’s demat account and credited to your demat account.
The transfer of shares from the seller’s demat account to your demat account is facilitated by the Depository Participant (DP) appointed by you. A DP is a registered agent of the depository (NSDL or CDSL) and is responsible for maintaining your demat account.
Selling of Shares
When you sell shares, both your trading account and demat account come into play. When you place a sell order in your trading account, the shares are debited from your demat account and transferred to a pool account maintained by the stock exchange. From there, they are transferred to the buyer’s demat account, which is credited with the shares.
Therefore, the sale proceeds are credited to your trading account once the transaction is complete. It is important to note that the trading account and demat account are two separate entities, and while the trading account allows you to trade in the market, the demat account is used solely for holding and maintaining shares.
Cost Charges
There are various costs and fees associated with trading and demat accounts, and it is important to understand them before opening an account. Let’s explore the difference between a Demat Account cost charge and a Trading Account cost charge.
Trading Account Fees
- Brokerage Fees: The broker charges this commission on trading transactions, typically as a percentage of the trade value. For example, if the brokerage fee is 0.1% and you buy shares worth ₹10,000, the brokerage fee will be ₹10.
- Transaction Fees: These are charges levied by the stock exchange for executing the trade, which can range from 0.003% to 0.05% of the trade value.
- STT, GST, and Stamp Duty: These charges are levied by the government and vary from state to state.
Demat Account Fees
- AMC: This is the annual maintenance charge levied by the depository for maintaining the demat account, which can range from Rs. 300 to Rs. 1,000 or more, depending on the depository and the type of account.
- Dematerialization Charges: If you want to convert physical share certificates into electronic form, you may be charged a fee for dematerialization.
- Rematerialization Charges: If you want to convert electronic shares back into physical form, you may be charged a fee for rematerialization.
It is important to note that the exact costs and fees associated with trading and demat accounts may vary depending on the broker, depository, and the type of account.
Is it Possible to Open a Demat Account Without a Trading Account, or Vice Versa?
You are not obligated to open both a Demat and Trading account. You can easily have one without the other. For instance, if you plan to trade exclusively in futures and options, a Demat account is unnecessary. On the other hand, if you’re applying for an Initial Public Offering (IPO) and intend to hold onto the delivery of shares, a Demat account will suffice. But if you wish to sell those shares, a trading account is required.
However, when dealing with equity delivery trading, having a Demat account is mandatory. Therefore, the need for trading account, a Demat account, or both depends on your specific objectives.
To Wrap It Up…
To conclude, it is important to understand the difference between trading and demat accounts as investing in the stock market has become increasingly popular among individuals looking to grow their wealth. Thus, to invest in the stock market, you need to have a demat account that helps you hold and trade securities electronically. There are several options available to open a demat account, but if you’re looking for a hassle-free and convenient experience, you may consider opening a demat account on smallcase.
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FAQs
If you only plan to hold assets like government bonds, institutional bonds, or gold bonds in your demat account, you can skip having a trading account. A demat account streamlines bond storage, especially for such assets.
For smooth transactions, you need a trading account and a Demat account. Demat stores securities, and trading needs a brokerage account. So, choosing between a brokerage and Demat account isn’t difficult.
Open a Demat account with a PAN card, government ID, and address proof. Your brokerage will verify and provide a client ID for transactions.
Yes. You should include a nominee when opening a Demat or trading account to streamline the share transfer process.
A trading account is a versatile tool for buying and managing securities, such as stocks, commodities, and forex in the public market. Day traders often use it as their primary account.
A Trading account allows you to actively purchase and sell shares in the stock market, while a Demat account serves as a digital repository for storing the shares you acquire.
A Demat Account holds shares and securities electronically, streamlining the management of investments like shares, mutual funds, government securities, and bonds.
