What is the difference between Demat and Trading Account

The main difference between a Demat and a trading account is that a Demat account holds shares and securities in digital mode, while a trading account provides the interface to buy and sell shares in the stock market.

Although both are important for trading in the stock market, they serve two different purposes. In this blog, we’ll delve into how these accounts work and their unique features. Let’s demystify the functions of Demat and trading accounts to help you sail through the financial world with ease.

What is a Demat Account?

Converting your physical shares into the electronic format is called dematerialization. Holding physical shares involves risk and shares in the Demat Account are stored easily. Once you open 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.

What is a Trading Account?

A trading account is used to buy/sell shares in stock markets. Once you have a Demat Account, you need a Trading Account which has a unique trading number used to trade in shares. Once you start trading in share markets, you need three accounts: Bank/Demat/Trading Account. 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.

Understanding the Differences between Demat Account and Trading Account

Fees and Charges for Opening Demat and Trading Account

• Account Opening Charges: Most brokers offer free account opening for Demat and trading accounts, especially as part of promotional offers. However, some brokers charge a one-time fee, depending on the service provider.
• Annual Maintenance Charges (AMC): Demat accounts generally have an annual maintenance fee, while trading accounts may have no AMC or a minimal fee, depending on the broker.
• Transaction Charges: Demat accounts charge an amount for debiting securities, while trading accounts generally include brokerage charges for buying or selling securities.
• Custodian Charges: Some brokers take a custodian charge that they hold securities in their Demat account.
• Other Charges: Fees for services like account statements, duplicate account documents, and inactivity.

Can you open a Demat account without having a Trading account or vice versa?

• There is no obligation to open both Demat and Trading accounts. You can easily have a Demat Account without a Trading Account or vice versa. If you wish to trade only in futures, options then you do not require a Demat Account.
• 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 want to sell these shares, then you would require a trading account.
• However, when it comes to trading in form of equities, you are bound to compulsorily have a Demat Account.

Thus, whether you need to open a trading account or a Demat account or both depends on the intended purpose.

Understanding the Process flow of Trading and Demat Accounts

To buy shares, you need to start with funding your trading account via NEFT/RTGS/IMPS margin in your trading account that could be used to buy shares.

The working of a Demat account is similar to that of a savings bank account. In a savings account, cash is stored in an electronic form, and a Demat account holds physical securities in the same way. All Demat accounts are associated with a depository participant like NSDL or CDSL. A Demat account is credited when shares are bought and it is debited when the securities are sold.

Trading account functions as a reserve for funds used in trade activities. Money from your bank accounts needs to be transferred to a trading account to be used for buying or selling securities. Any shares not squared off during the intraday trade, go for delivery in your trading account. A trading account is debited when shares are bought and it is credited when the securities are sold.

Role of Trading Account and Demat Account

A Demat Account is required to hold your shares in an electronic format and to trade in stock markets, you require a trading account. Post opening, you must begin your trading journey with a thorough understanding of the market.

While trading in the shares market, both Demat and trading accounts are crucial. When you buy the shares of any company, you require a trading account to process the transaction. The money is debited from the trading account and the bought shares are credited to your Demat account.

In the same way, when shares are sold, they are debited from your Demat account. The money credited in this transaction will reflect in your trading account. Therefore, to trade in the stock market, it is crucial to have both these accounts and link them through a Demat account app.

Conclusion

The trading account and Demat account work in tandem with each other. For trading in equity, you must have both these accounts. It is important to pick a broker service that is suitable to your investment needs.

IIFL is your one-stop solution to trading in everything from equities and mutual funds to commodities and currencies. To learn more about opening a Demat and Trading account reach out to our financial experts and kickstart your investment journey.