Demat vs Trading Account – What’s the difference?

 Hi Investors & Traders!

 Today, I am writing this post regarding the demat vs trading account because of the popular demand by our readers. Many of the readers of  asked me to cover this topic as they are constantly confused about what is a demat and trading account and their difference.

Therefore in this post, I am going to explain what is the difference between the demat and trading accounts in a very simplest possible words.

Most of the newbies who enter the stock market might already know that they’ll need a demat and trading account to start trading/investing in India. However, the majority of beginners do not know the difference and consider both the demat account and trading account to be the same. But in reality, both these accounts are entirely different and serve different purposes.

Difference between demat and trading account

— Trading Account

A trading account is a medium to buy and sell shares in a stock market. In simple words, it is used to place buy or sell order for a stock in the exchange.

Different stockbrokers offer different trading tools to their clients to simplify their trades. For example, Zerodha, Groww the biggest stockbroker in India offers ‘KITE’ as their platform to trade in stocks. Once you have opened your trading account with a stockbroker, you can place your buy/sell orders using those platforms.

— Demat Account

Demat account is the short form for ‘Dematerialised account’. It is similar to a bank account. Just as money is kept in your savings account, similarly your bought stocks are kept in your demat account.

In other words, a demat account serves as a facility where stocks that you buy are deposited and the stocks sold are taken away. Demat account is used only for the storage of stocks, not for transactions (buying/selling).

Example of Demat and Trading Accounts

Let us understand the difference between trading and demat account further with the help of an example. Assume that you wish to buy 100 stocks of Maruti Suzuki. Here, the sequence followed during the procedure will be as follows:

1. First of all, you’ll need to have a savings equal to or greater than the buying amount in your savings account.
2. Next, you’ll transfer the money from saving account to trading account.
3. Now, you’ll buy stocks of ‘Maruti Suzuki’ from the stock exchange by using your trading account and paying the amount.
4. Finally, the money is transferred to the seller through your trading account and stocks of ‘Maruti Suzuki’ will be transferred to your demat account.

Now let us assume that after a few months, you wish to sell 20 stocks of ‘Maruti Suzuki’ from your holdings of 100 stocks. Here, the sequence followed will be as follows:

1. First, you’ll place a sell order in the market using your trading account to find a buyer.
2. If a buyer is found, then the shares will move from your demat account to the buyer.
3. Finally, the money gained by selling your stocks will flow through your trading account to your linked savings account.

Quick Fact About Demat Account

Before the internet became popular in India, there were no demat accounts. Share certificates were provided whenever you buy stocks (on papers). However, there were many limitations to using paper share certificates. They used to get torn, stolen, faced safety-related issues or the ink just gets fade away with time.

Nevertheless, after coming of the internet from the mid-1990s, the stocks started getting kept in the electronic dematerialized form in the demat account of the buyers. It resolved most of the limitations of the old paper share certificates.

A few other points to know about demat and trading account

1. Demat and trading accounts are opened together (also known as 2-in-1 account) with most of the popular stockbrokers in India. For example, Zerodha, Angel Broking, 5 Paisa, etc.
2. A few big stockbrokers (generally bank brokers) also offer a 3-in-1 account i.e. Saving+Demat+Trading account to their clients. For example ICICI Direct, HDFC Securities, etc.
3. In general, there are no annual maintenance charges for a trading account, where for the demat account this maintenance charge may vary from broker to broker. It is typically around Rs 300-400 per year.
4. These days, the investors and traders can open instant (paperless) demat and trading account within 10 minutes with major stockbrokers. Nonetheless, the facility of offline account opening is still popular in India and offered by all these brokers.
5. The account opening charge for demat and trading account also varies from broker to broker. A few brokers offer free account opening. However, the majority of them will charge somewhere between Rs 300-500 to open your brokerage account.
6. In addition, you are also allowed to open multiple demat and trading accounts using same PAN card. For instance, You can have multiple accounts- one in ICICI direct and other in Zerodha.
7. Finally, choose your broker wisely to open your demat and trading account if you want to avoid unnecessary charges and risks.

Summary

Let us quickly summarize what we discussed in this article regarding trading and demat account in India.

A trading account provides a platform to buy or sell the share in the market. It acts as an intermediary between your saving accounts and demat accounts. In simple words, it takes share from your demat account and sells them in the market.

On the other hand, it takes money from your savings account and buys a share to keep in a demat account. Further, a demat account is a facility to keep your shares in an electronic dematerialized form.

How to open Demat account and Understand some financial Terms

If someone needs to buy shares or stocks , Exchange traded funds (ETFs)  then one needs to have a demat account. This article tries to define in Q & A form about Demat Account.

What is demat  account?

In India, shares and securities are held electronically in a Dematerialized or Demat account, instead of the investor taking physical possession of certificates. Just like  bank which holds the funds for depositors one needs a Depository to hold these shares in electronic format.

What is a Depository and Depository  Participant?

A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form. To avail the depository services one needs an intermediary through which investors can avail the depository services i.e store their shares etc in electronic format called as Depository Participant(DP).  DPs also provides services related to transactions in securities. In India there are two depositoriesNational Securities Depository Limited   (NSDL) and Central Depository Services (India) Limited (CDSL) . While ICICIdirect, HDFCSecurities and independent brokerage firms like Indiabulls, Religare, Reliance, IndiaInfoline and ShareKhan are Depository Participants.

How to Start Stock Investing?

To start investing in the stock markets, you need 3 types of accounts – Trading Account (to place buy/sell orders), Demat Account (to hold your shares in dematerialized form), and a Bank Account (for fund transfers).

Trading Account
An account similar to a bank account, to be opened with a ‘stock exchange registered stock broker’. This account is used for placing orders in the stock exchange (i.e. to buy/sell shares).

Demat Account
An account where shares are held in a dematerialized form (i.e. electronically instead of the investor taking physical possession of certificates). The demat account is necessary to receive/transfer shares when you buy/sell shares through your trading account.

Bank Account
Your regular savings or current bank Account should be linked to your trading account. The Bank account is required to transfer/receive money when you buy/sell shares through your trading account.

Typically, if you sign up with a stock broker, they will guide you on not only the opening of the trading account but also the demat account and linking of your bank account. Just like banks provide you with the facility to open and maintain saving accounts, in the same way the Depositories* provide the facility to open and maintain demat accounts. In India, the government has mandated two entities –National Securities Depository (“NSDL”), and Central Depository Services (India) (“CDSL”) – to be the custodian of dematerialized securities.

Most big stock brokers register themselves as a Depository Participant (“DP”)who act as an agent of the Depositories to make its services available to the investors. Effectively both your trading account and your demat account is maintained by your stock brokers (mostly through setting up of 2 different entities). In case of some stock brokers, they use the depository services of other bigger financial institutions or custodians and only provide the front end trading account. As an investor, no one approach is better than the other for you, as typically, it takes the same amount of time for shares to be deposited and withdrawn from the demat account in either case.

To open a trading / demat account, follow the following process:

1. Approach a BSE and NSE registered stock broker.
2. Fill up the KYC form provided by the stock broker.
3. Attach the required documents – (i) identity proof and (ii) address proof.
4. Produce the original PAN card during account opening.
5. For Derivatives segment (i.e. futures and options market), 6 months account statement of your existing bank account is required.
6. One cancelled cheque of the bank account you want to link to your trading account.
7. 3 passport size photographs

If you have any doubt than share in the comment box ...