Although most of our transactions and activities on the stock market take place in close interaction and cooperation of your demat account, your trading account and your bank account, they are different from one another.
What is a Demat Account?
Dematerialized account popularly known as a Demat account is a form of account used to hold, trade and transact shares and securities in electronic form. While trading in stocks and securities online, shares and securities are purchased and held in a Demat account, and thereby facilitating an easy trade for the users. A Demat account can hold all forms on securities investments such as shares, exchange -funds, bonds government securities, and mutual funds in one single place.
Post Dematerialization of shares, i.e. conversion of Physical share certificates into electronic form, which was done to ease maintaining and accessing securities investments from anywhere throughout the world. Demat accounts have become a must-have for anyone who wishes to invest in shares and securities, and it is mandatory to open a demat account if someone wants to buy or sell shares vide the stock exchanges.
What is a trading account?
A trading account is an account which allows an investor to buy and sell shares and securities online. Trading accounts are often linked with bank accounts and demat account. Trading accounts are linked to bank accounts to provide liquidity while purchasing shares and deposit money when selling shares, whereas trading accounts are also connected to demat account as shares bought and sold on trading accounts need to be stored in a demat account in dematerialised forms. A trading account credits a demat account when shares or stock is purchase and debits the demat account when a stock or share needs to be sold.
Difference between a demat account and trading account
With many banks offering a combination of a demat account and trading account which are also referred to as 2-in-1 account and with many banks also offering 3-in-1 accounts, many novice investors often confused between demat account and trading account to be one and the same thing. Here are some of the differences between a demat account and trading account.
- Nature of Account
A demat account is an account wherein an investor stores or holds their shares and securities in a dematerialised form which they have purchased from the stock market. It is similar to how saving accounts hold an account holders money, but a demat account, instead of keeping the money, holds shares and securities in a dematerialised form.
Whereas, a trading account is used to buy, sell and trade shares and securities. Once a stock is purchased it needs to be transferred and stored in a demat account, or when a stock is to be sold, it needed to be withdrawn from the demat account and transferred to the trading account for sale.
Hereby, in simple words, a demat account can be termed as a storage unit for shares and securities whereas a trading account is required to transact on the stock market.
- Function of Account
The function or purpose of a demat account is holding, or storage of shares, stocks and security in an electronic or dematerialised form and it can also be used to re-materialise shares or securities, i.e. converting shares from electronic to physical form, although it is not a popular option.
Where the function of purpose of a trading account is to buy, sell and trade securities. Shares are credited into a demat account upon purchase and are credited from the demat account when they are to be sold in the market. The buying and selling of shares take place through the trading account.
Further for dealing in options, futures, currencies etc., an investor does not need a demat account to trade or transact in the said asset class, but while transacting in shares and stock, an investor requires both a trading account as well as a demat account.
- Role of the Account
An investor’s bank account is credited when shares are debited from their demat account and sold in the market using a trading account whereas an investor’s bank account is debited when shares are credited into the demat account and purchased from the market using a trading account.
This signifies that an investor needs to have both, a demat account and a trading account if they wish to buy, sell, trade and invest in shares and stocks.
- Ways to open an account
When an individual wishes to open a demat account, they are required to approach a depository participant or a DP, fill in an application form for opening of a demat account, submit KYC documents like address proofs and identity proof and sign an agreement with the DP. Also, the cost involved in opening a demat account includes account opening fees, account maintenance fees, custodian fee and a transaction fee. Further, a payment of a service charge is to be made to the DP.
Whereas, to open a trading account, an individual can open a trading account with little or no security deposit and less paperwork if they already have an existing demat account.
- Demat account operations are much secure when done using a trading account
There are two types of demat account, i.e. With Power of Attorney and Without Power of Attorney. Both types of accounts require a broker.
In the With Power of Attorney demat account, while selling shares, a broker deducts shares from a demat account, whereas in case demat account without Power of Attorney, the brokers needs to provide a delivery instruction by the demat account holder before selling their shares otherwise the said shares will be sent for auction.
Whereas, when using your demat account along with a trading account, the investor only requires a username and a password to access his account to buy, sell and hold shares using their trading account and demat account, thereby eliminating the need of a broker from the entire process.