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Difference Between Demat Account and Trading Account

If you want to invest in stock markets, there are a plethora of factors that you should be aware of. Making money in stock markets is not a gamble or a lottery, but a process of systematic and scientific investments. Foremost, you should be aware of the fundamentals of stock markets. The first step for stock market investors is to open up a trading and Demat account. Your trading and Demat account will form the crux of your trades.

One crucial aspect is to know the difference between Demat Account and Trading Account. As a novice trader or investor, knowing this difference would ensure that you open the most suitable Demat and Trading accounts, and begin your journey of wealth creation plan.

What is Demat Account and Trading Account

Demat Account:

A Demat account is also known as Dematerialized account. In other words, converting or dematerializing your physical shares in the electronic format is known as holding a Demat Account.

How it works:

 

  • Once you open a Demat Account, you will be provided with your unique Demat Account number. This will help you deal electronically with your shares. A Demat Account is quite similar to your bank account, where you have the option to deposit and withdraw money.
  • In your Demat Account, your securities can be debited or credited. Just like in many bank accounts where you can have zero balance, you can also have zero securities in your Demat Account.

Importance of Demat Account:

  • You can use your Demat Account to hold a wide variety of financial instruments like equity shares, mutual funds, government securities and exchange traded funds.
  • It allows you to conduct multiple activities, including trading and investing at the click of a mouse.

Trading account

  • A trading account is used to purchase and sell shares in stock markets. Once you have a Demat Account, and want to sell your shares, or purchase new securities, you need a Trading Account.
  • Your Trading Account will have a unique trading number, which will be used to trade in shares.

History of Trading Account:

  • Before the age of digitalization, share markets operated on an open outcry system, where traders used verbal communication along with gesticulations to buy/sell shares. But, after stock markets adopted the electronic system, the open outcry system was replaced by digital accounts.

  • Your Trading Account will have a unique trading number, which will be used to trade in shares.

Importance:

  • Once you want to start trading in share markets, you require having three accounts: A bank account, a Demat Account and a Trading Account. Let us understand this with an example. Ashok wants to purchase shares of a particular company. He will place an order through his Trading Account, following which the transaction will be processed in the given stock exchange. The shares will then be deposited in his Demat Account, while the requisite money will be deducted from his bank account.
  • So, to put it simply, a Trading Account acts as a link between your bank account and Demat Account, allowing you to trade in stock markets.
  • Having an online Trading Account helps you to secure access to multiple stock markets like National Stock Exchange (NSE), Bombay Stock Exchange (BSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX).

Understanding the Differences between Demat Account and Trading Account

Here is a look at the difference between both accounts.

Functional difference

The main function of a demat account is to hold securities like shares in an electronic format whereas a trading account is used to buy and sell shares in the stock market.Trading account helps you trade in the share market.

Difference in the nature of both the accounts

The main function of a demat account is to hold securities like shares in an electronic format whereas a trading account is used to buy and sell shares in the stock market.Trading account helps you trade in the share market.

The role of a Demat vs a Trading account

The key role of a demat account is to ensure the safety of investor’s shares. It allows investors to store shares in an electronic form, instead of the physical form. This account represents your current wealth in the form of shares or stocks. Whereas you need a trading account to purchase and sell shares. This account allows you to carry out trading transactions in the stock market.

The difference in the measurement of time

As a demat account holds your shares and other securities, it is measured as a stock at a specific point in time i.e., end of each financial year or on March 31 whereas a trading account is a flow statement that reflects your trading transactions and is always measured over a period of time.

Account Opening Process: Demat And Trading Account

Opening a Demat Account

Opening a Demat Account can be explained with the help of following simple steps:

Step 1: Contact any Depository Participant (DP), who is an agent of the depository. Their list is found on the websites of Central Depository Services (India) Ltd and National Securities Depository Ltd.

Step 2: Fill the account opening form. Provide the requisite documents pertaining to proof of address and identity.

Step 3: Now you will have to sign an agreement. This agreement will provide the details regarding your rights and duties as an investor/DP. Do not forget to get a copy of the agreement along with the schedule of related charges.

Step 4: Congratulations! Your account has been opened. You will now receive a Beneficial Owner Identification Number also known as Demat Account Number.

Opening a Trading Account

Opening a trading account can be explained with the help of these simple steps:

Step 1: Select a broker/firm of your choice by comparing the different service charges and brokerage rates.

Step 2: Inform the broker that you wish to open a trading account.

Step 3: Fill the account opening form. Here, you are required to provide the requisite documents, including KYC details, address and ID proof.

Step 4: Now the authorities will verify your application. The application verification process may take some time.

Step 5: You will now receive the details regarding your trading account.

Step 6: Congratulations! You are all set to begin your journey of trading in stock markets.

Fees and charges for opening Demat and Trading Account:

  • Opening a Demat Account entails Annual Maintenance Charges (AMC), the amount for which differs from one service provider—known as Depository Participant (DP)—to another. You also might be required to pay transaction and custodian fees. Account Opening Charge on a Demat Account, however, has been removed.
  • For opening a Trading Account, you are not required to pay any charges or fee. At the stage of trading, however, you can be required to pay a slew of charges like brokerage rates, GST, STT, stamp duty, etc.
  • Here, you must remember that you can have multiple Demat and Trading accounts using a single PAN. All you require is to pay the requisite AMC and other charges.

Can I open a Demat Account without having a Trading Account?

  • There is no statutory obligation for you to open both Demat and Trading accounts. You can easily have a Demat Account without a Trading Account.
  • For instance, if you have applied for an Initial Public Offering (IPO), and just want to keep the shares, then a Demat Account would suffice. But, if you then want to sell these shares in stock markets, then you would mandatorily require a trading account.
  •  
  • For opening a Trading Account, you are not required to pay any charges or fee. At the stage of trading, however, you can be required to pay a slew of charges like brokerage rates, GST, STT, stamp duty, etc.
  • Here, you must remember that you can have multiple Demat and Trading accounts using a single PAN. All you require is to pay the requisite AMC and other charges.

Can I open a Trading Account without having a Demat Account?

  • This again is possible. If you wish to trade only in futures, options and currency derivatives, then a Demat Account is not required. This is because all these trading forms are settled in cash.
  • But when it comes to trading in all forms of equities, including equities intraday trading, you are bound by the regulations of Securities and Exchange Board of India (SEBI) to compulsorily have a Demat Account.

Understanding the Process flow of Trading and Demat Accounts

To buy shares in the stock market, you should start with funding your trading account. By debiting your bank account via NEFT/RTGS/IMPS or through a payment gateway transaction, you deposit a margin in your trading account that could be used to buy shares.

Any shares not squared off during the intraday trade, go for delivery in your trading account. By T+1 date, you will have to fund the balance delivery amount. On T+2, you will get a credit into your demat account and then shares held in the account could be sold whenever you want. By 11 am on T+1 date, you have to give the DIS to the broker for processing the demat debit or you can instruct online in case of internet trading. You can only sell clear (not marked) shares from your demat account.

In case of selling, on T+1 date, the shares get debited from your demat account. Following this, by end of T+2 date, the value of shares sold is credited into your bank account. This completes the buy/sell cycle in the trading / demat process!

Conclusion

Thus, you need to have a Demat Account to hold your shares in an electronic format. And to trade in stock markets, you require a trading account. Both are distinctive but crucial aspects of the trading process. After opening Demat and Trading accounts, you must begin your trading journey with a thorough understanding of the market and their instruments. You must always remember to take expert counsel as investment in stocks is subject to high market risk.

To begin your stock market journey, you can take advantage of the many benefits IIFL’s Demat and Trading accounts have to offer. IIFL is your one-stop-solution to trading in everything from equities and mutual funds to commodities and currencies. What’s more, you get access to all the market segments 0f BSE, NSE, MCX and NCDEX. With an award-winning research team and world-class technological platforms, IIFL can help you reach new heights of trading.

Frequently Asked Questions Expand All

The following entities can apply for a demat and trading account:

Individual

  • Resident Individuals
  • NRIs
  • Minors (Only in case of demat account)

Non-individual

  • Corporate
  • Partnership firms
  • Bank
  • Mutual Funds
  • LLP (Liability Limited Partnership)
  • FII/FPI (Only trading account)
  • Registered/Unregistered trust
  • Registered/Unregistered society
  • Association of Persons (AOP)

India Infoline does not charge any account opening fee. Although, it charges a nominal fee for maintaining a demat and trading account. When you open a demat or trading account with India Infoline, you don’t need to pay any annual maintenance charges (AMC) for 1 year. However, you will have to pay an AMC of Rs. 250 from second year onwards.

Individual beneficial owners must add a nominee while opening a demat or trading account as this makes the process of transfer of shares much more convenient.

Yes, you can easily transfer shares from one demat account to another. It can be done in two possible ways – manual and online. Manual mode of transfer requires a physical form. This type of transfer is also called an intra-depository or off-market transfer. While in the online transfer of shares, you have the option to transfer shares from one demat account to another online. All you need to do is to mention your demat account number in DIS.

Yes, you can open a joint demat or trading account with India Infoline. In addition to this, a demat account can have a maximum of three account holders, including one main holder and two joint holders. IIFL allows you to open your demat or trading account in a single account name, multiple account names, or joint account name.

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