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Demat Account vs Trading Account (With FAQs)

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Earning profit in stock markets isn’t always a gamble, however a procedure of systematic & scientific investments. It is important to be aware of and know the fundamentals of the stock market. The very first step in the stock market is to open up a Demat account and trading account. Further, it’s also necessary to know the differences between a Demat account and a trading account.

Table of Contents

What is a Demat Account?

Converting your physical shares into a digital form is known as dematerialization. Holding physical shares always involves risk and trading with physical shares is very time taking whereas shares in the Demat account are stored and traded very easily. Once you open a Demat account is likewise referred to as Dematerialized account. In different words, converting or dematerializing your physical shares to digital form is referred to as keeping a Demat Account.

What is a Trading Account?

A trading account is used to trade shares in stock markets. Once you’ve got a Demat Account, you should have a Trading Account which has a completely unique trading number used to trade in shares. Once you begin buying and selling in share markets, you need 3 accounts:

Bank account / Demat account / Trading Account.

Trading Account acts as a link between the bank account and the Demat account, permitting you to trade in share markets.

Demat Account vs Trading Account

Difference Based on Functions: Demat account is used to hold shares in digital form. On the other hand, a trading account is used to buy or sell stocks in the stock market.

Difference Based on Nature: A Demat account works similarly to a savings account. A savings account holds money where you can make credit or debit. Similarly, in a Demat account, you can store securities in a Dematerialized form which can be credited or debited accordingly.

On the other hand, a trading account acts like a current bank account. You need to have both a Demat account as well as a trading account to buy or sell in the share market.

Difference Based on Measurement of time: Shares held in the Demat account are measured as a stock at a particular point in time while a trading account reflects your buying or selling transactions done over time.

Opening a Demat Account

  • Contact your most preferred DP (Depository Participant) to open a Demat account. The list of all the DPs is available on the websites of CDSL (Central Depository Services Ltd) and NDSL (National Securities Depository Ltd).
  • Fill out all the details in the account opening form and provide essential documents like Address Proof, Identity proof.
  • Accept and sign the agreement. This agreement contains all the details about your rights and duties as an investor or DP.
  • Congratulations! Your Demat account has been opened.

Opening a Trading Account

  • Opening a trading account is an easy and hassle-free procedure. Keep all the required documents available and just follow the steps to open your trading account.
  • Choose a broker considering different factors like service charges and facilities offered by them.
  • Fill out all the details in the account opening form. Here, you’re required to complete your KYC by providing details like address proof, identity proof, photographs, signs, etc.
  • Now your application will be verified by the authorities.
  • Then you will receive the details regarding the trading account.
  • Congratulations! You are prepared to start your journey in the share market.

Fees & Charges For Opening Demat and Trading Account

Opening a Demat Account involves Annual Maintenance Charges which range from one carrier issuer to another. You may additionally be required to pay transaction/custodian fees. For Trading Account, you aren’t required to pay any prices. You need to recollect that you may have more than one Demat and Trading money owed for the usage of a single PAN Card; all you want to do is pay the needful Account Maintenance Charges (AMC).

Can you open a Demat account without having a Trading account or vice versa?

There isn’t any responsibility to open each Demat account and Trading account. You can without difficulty have a Demat Account without a Trading Account or vice versa. If you want to trade in futures or options only, then you do not need a Demat account.

 If you’ve applied for an IPO (Initial Public Offering), and simply need to hold the stocks, then a Demat Account could suffice. But, in case you need to sell those stocks, you then definitely need a trading account.

However, on the subject of buying and selling in form of equities, you’re certain to compulsorily have a Demat Account.

Thus, whether or not you want to open a trading account or a Demat account or each relies upon at the supposed purpose.

Process Flow of Demat Account and Trading Account

To purchase stocks, you want initially invest your trading account through NEFT/RTGS/IMPS margin in your trading account that might be used to purchase stocks.

The working of a Demat account is just like that of a savings account. In a financial savings account, money is saved in a digital form, and a Demat account holds physical securities withinside an equal way. All Demat accounts are associated with a DP (depository participants) like NSDL or CDSL. A Demat account is credited whilst stocks are offered and it’s far debited whilst the securities are sold.

A trading account works as a reserve for funds used in trading. These funds are transferred you’re your savings bank account to a trading account for buying or selling stocks in stock markets. Any stocks which are not squared off during the intraday trading, go for delivery in your linked trading account. A trading account will always be debited when shares are purchased and will always be credited when the securities are sold.

Role of Demat Account and Trading Account

A Demat Account is needed to preserve your stocks in a digital form and to trade in share markets, you will need a trading account. But before starting, you should have a thorough understanding of the share market and how trading is done in the market.

While buying and selling withinside the stock market, each Demat account and a trading account are important. When you purchase the stocks of any company, you require a trading account to system the transaction. The cash is debited from the trading account and the bought stocks are credited to your Demat account.

In an equal way, whilst stocks are sold, they are debited out of your Demat account. The cash credited on this transaction will credit to your trading account. Therefore, to trade in the share market. It is really important to have both a Demat account and a trading account and both accounts should be linked.

Summary

The Demat account and Trading account are linked to each other and work together. For trading in the share market, you must have both the Demat account and trading accounts. It is important to choose a broker that is suitable according to your needs.

Further Readings

Click on the below links to read relevant articles.

FAQs

Is the Demat account a bank account?

A Demat account is comparable in nature to a savings account. Just as cash can be deposited electronically into a savings account, investors can deposit securities into a Depository Participant (DP) Demat account affiliated with the NSDL or CDSL.

What is the minimum balance for the Demat account?

Demat Accounts do not require a “minimum balance” in stocks or securities. You can also link multiple Demat accounts to one PAN. But not with the same DP.

Do I need Demat for SIP?

So, the short answer to this question is no. You do not need a Demat trading account to invest in SIP. With significant advances in technology, you no longer need to have a Demat account to start investing in SIP. You only need a Demat account if you want to invest in the stock market.

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