Demat Account Vs Trading Account

For those of you who want to invest in stock markets, there are few basics that you have to be aware of. Two of the most important requirements for trading in a stock market involves, a demat account and a trading account. A demat account is an account in which you can store your shares or other classes of assets in a dematerialised form. A trading account is an account that enables you to transact. Despite the fact that these two accounts are vital, a lot of people lack clarity on it. This article covers the following:

What is a Demat Account?

Demat is simply an account that allows you to hold your shares in an electronic format. A Demat account converts the physical shares into an electronic form, therefore dematerializing them. On opening a Demat account, you will be given a Demat account number to be able to electronically settle your trades. The workings of a Demat account is very similar to that of a bank account where you keep your money with the option to deposit and withdraw. In your Demat account too, the securities are held and accordingly debited and credited. You do not need to have any shares to open a Demat account; In fact, you can even have zero balance in your account.

What is a Trading Account?

To conduct your stock trading activities you require a trading account. This is because when a company lists its shares in the stock market you can trade the same on an electronic system through a special account known as a trading account. You can get such an account by registering with a firm or a stockbroker. With this account, you are assigned a unique trading ID which grants you access to conduct trading transactions.  

Difference between a Demat Account and a Trading Account

The following are the main areas where a Demat and a Trading Account differ:

The functionality of a Demat Vs a Trading Account

One major difference between the two accounts pertains to the functions each performs. A trading account is used for the buying and selling of securities by means of it getting debited from your Demat account and sold in the market. A Demat account, on the other hand, allows investors to keep their financial instruments in an electronic format. This also works in a way where you can change your electronic format securities into physical form as well.

The nature of the two accounts

A trading account functions in the same way as your current bank account would; it, in fact, links up to your Demat and your bank account. It works to sell your shares in the market by withdrawing them from your Demat account. A Demat account is a place where the shares and securities that you buy from the market are stored. Unlike a trading account that functions like a current bank account, a Demat account works like a saving account.

The role of the two accounts

Both these accounts, as different as they may be, are crucial for any trading in the share markets. When, as an investor, you buy the shares of any company, you use the trading account to do so. The money is debited from your bank account and the shares are reflected in your Demat account where they are also credited. 

Similarly, when you sell your shares through your trading account, the same gets debited from your Demat account and are then sold in the market. The proceeds of this sale are credited back to your bank account. Thus, in order to trade in the stock markets, it is mandatory to have both a Demat as well as a trading account.

The table below shows summarises the major differences between Demat and trading accounts:

How to open a Demat Account

You can open a Demat Account following these simple steps:

Step 1: Get in touch with an agent of depository or a depository participant to fill the form required for opening a Demat account. You may access the list of depository participants (DP) on websites of depositories like the Central Depository Services (India) Ltd and National Securities Depository Ltd.

Step 2: Fill the account opening form with copies and documents of ID and address proof.

Step 3: Sign an agreement with the DP that outlines the details of your rights and duties as an investor and DP. Remember that you have the right to receive a copy of the. agreement and the schedule of related charges for your reference.

Step 4: The DP will open your account and give you a Demat account number, also known as Beneficial Owner Identification Number

How to open a Trading Account?

Opening a Trading Account is made simple in the form of the following process:

Step 1: Begin with selecting a broker or a firm.

Step 2: Make sure to make a comparative study of the brokerage rates and the services included.

Step 3: Contact the shortlisted broker for opening your account.

Step 4: Fill in an account opening form, which most probably requires you to provide KYC details. You will have to submit this along with your ID and address proof.

Step 5: Undergo an application verification process.

Step 6: Get the details of your trading account.

Step 7: Start Trading!

While opening a Demat and a trading account has been made simple, as an investor you still require to approach the stock markets with a good understanding of the markets and the instruments traded therein. Investing in stocks is subject to market risk and must be accompanied by expert counsel.