Understand the difference between Trading Account and Demat Account

To invest in the share market and kick start your journey as a trader, you need to fulfil certain formalities. You need a regulated dematerialized (demat) account and a trading account for share trading. Wondering whether there is a difference between these two accounts? Well, you’re not alone. Many traders often confuse between these two accounts and do not know about the role, function and benefits of these accounts.

Let’s help you determine whether you need to open a demat account, a trading account or both.

What is Demat Account and Trading Account?

A demat account is a vital component of online trading. This account converts the physical paper documents of the securities that are issued to an investor (you) into an equivalent amount of shares in electronic format. It is only after this conversion, the shares get transferred into the demat account of the investor (you).

In fact, the Depository Act 1996 governed by Securities and Exchange Board of India (SEBI) mandates investors to have an active demat account for conducting transactions in the share market. This means an investor has to open this account when they register with a licensed broker like IndiaNivesh Securities Ltd.

On the other hand, a trading account facilitates buying and selling of securities. While using this account, the securities get deposited with the broker for online share trading. This account basically is a form of intermediary between the demat account and savings bank account. For example, if you want to buy stocks of company B, then to do this you have to transfer funds from savings to trading account. After this, the purchased shares get deposited to the demat account which is linked to the trading account.

Whenever you begin share market trading online, you have to open these two accounts, where the trading account holds transactions that can be used to trade shares, and demat account holds shares, mutual funds, ETFs, gold bonds and other such associated assets.

Comparison Between Demat Account and Trading Account

Here is how a demat account differs from trading account in terms of their nature, functionality and charges.

• Nature: Demat account is provided by the depository participants (DPs) and holds the list of securities that you own electronically. But trading account is managed by the stock broker (like IndiaNivesh Securities Ltd.) and allows you to buy/sell shares at the exchange. Thus, the quasi-regulator of demat is the depository, while for trading account it is the Stock Exchange.

• Functionality: The demat account is more or less like a standard bank account, giving the opportunity to deposit or withdraw the securities. However, trading accounts are designed to place orders for selling or buying from the secondary market.

• Charges: Once you have an active demat account, you have to pay the annual maintenance charges (AMC) which varies with DP. Along with this, rejection of delivery instruction slip (DIS) and demat request form (DRF) also attracts additional charges. There are no such fees charged for a trading account.

The Bottom Line

If you wish to participate in the share market, having both demat and trading account is important. Prestigious brokers who specialize in online trading in India realize this. Thus, they offer a combination of both these accounts, ensuring you are able to trade from anywhere, anytime.

Nirav Singhaniya is a Financial Advisor and Share Marketer with 10 years of experience. In his free time, he likes to research on stock trading and share market trends.