If you are a new investor who is just starting off with basic exposure to the stock markets, you would surely have come across the terms Demat account and Trading account. Having these two accounts is, in fact, the first step towards entering the vast world of stock markets. Both these accounts form the pillars of any trade that takes place in the stock markets.
So, are these two the same or different? Will you need only one of these or both? As an investor or trader, you should know the differences between a Demat account and a trading account. This will help you know which account is best suited for ensuring a smooth journey towards wealth creation.
Demat or dematerialization is an account that essentially transforms physical shares into digital format. Through this account, an investor can hold digital shares that he/she has invested in. For opening a Demat account, one does not need to possess any stocks or shares, as it can be opened with zero balance. It works just like any zero-balance bank account. While bank accounts are meant for monetary transactions, Demat accounts are meant for recording the purchase and sale of stocks or shares. Apart from equity shares, these accounts can also be used to hold other forms of investments, like bonds, mutual funds, government securities, etc.
Recommended read – How to invest in mutual funds without a demat account ?
Stock market investors can open a Trading account with any registered stockbroker. This account primarily links an investor’s Demat account and bank account. The objective of a trading account is to maintain the records of all trade transactions. For example, whenever a trader buys shares, the order is essentially booked through a trading account. As a next step, the order then moves to the stock exchange, where processing takes place and later, the agreed price of the shares is deducted from the trader’s bank account. Once the amount is deducted, the digital format shares are credited to the trader’s Demat account.
Although Trading and Demat accounts are inter-connected, these two are different from each other in many ways. Here, we will explore some of the key differentiating factors of these two accounts by asking three important questions:
As mentioned earlier, a trading account acts as a bridge between your Demat account and bank account. A trading account acts as a current account held with a bank. To sell shares, a trader needs to have a Trading account as it withdraws shares from the Demat account of the trader. On the other hand, when a trader wants to buy shares, the Trading account allows withdrawal of funds from the bank account for the purchase of shares, which will then be deposited into the Demat account.
Demat account functions like a bank’s savings account. The stocks or shares purchased by an investor are saved in this account in digital form. Apart from storage functionality, the account also acts as a reference for all buy and sell transactions of the account holder.
While a Demat account is used for storing financial instruments, including stocks and share certificates, a Trading account is used for the purchase and sale of these instruments. Demat accounts also allow investors to convert digital securities into physical forms.
When it comes to the importance of Demat and Trading accounts, an investor cannot have a choice between the two, as both are essential for any trade to be initiated and executed. Trading account is important for buying and selling shares as it allows fund transfer to take place from the investor’s bank account. It also allows debit and credit of stocks to take place in the investor’s Demat account.
Without a Demat account, an investor cannot buy or sell stocks, since this is where the securities get stored. Therefore, both the accounts are equally and uniquely important.
Here is how you can open a Demat account:
Here are the steps for opening a Trading account:
After opening a Demat and Trading account, investors must remember to link the two. It is also important to be aware of all the charges involved in these two accounts. Since there are a number of DP options available in the market, one can choose a DP that offers the best rates and services.
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