Difference Between Trading and Demat Account
If you are interested in investing in the stock market, there are a few things that you need to know. One of the most important and compulsory requirements is to have a demat account and trading account. A lot of novice traders confuse the two, mainly because both of them are linked.
If you are interested in investing in the stock market, there are a few things that you need to know. One of the most important and compulsory requirements is to have a demat account and trading account. A lot of novice traders confuse the two, mainly because both of them are linked. Demat and trading accounts both have different functions in stock market investment. Both these accounts can be opened online. This article aims to help you understand the difference between a trading account and a demat account.
What is a Trading Account?
A trading account allows you to trade the shares of different companies on the stock market. You can use this account to buy/sell shares and carry out different transactions. It works alongside a demat account. This means that the shares that you buy through a trading account are held on your demat account. You can use the trading account to sell the shares and securities whenever you want. All trading accounts have a unique number, just like your bank account.
What is a Demat Account?
A Demat/dematerialised account is an account that holds your shares. A Demat account converts the shares to an electronic/digital format. Demat account is where all the shares and securities that you purchase are stored like bonds, shares, options, futures, mutual funds, exchange-traded funds (ETF), etc. Just like a trading account, demat accounts also have a unique number. You can open an account with no or zero balance. Your demat account can also be empty with no shares in it.
Difference Between Trading Account and Demat Account
The main difference between a trading account vs demat account is that trading account captures the market transactions over a time period. On the other hand, a demat account holds the securities and shares in a digital format for a particular period of time. The table below shows the major differences between trading account and demat account:
| Parameter | Trading Account | Demat Account |
| Definition | It is an account that works as a link between your demat account and bank account | It is an account that is used to store shares and securities in a dematerialised form |
| Transaction | This account helps with buying/selling, transferring shares and securities and cannot be used for storing them | This account helps with storing and holding different financial instruments like equity shares, government securities, mutual funds and exchange-traded funds (ETF) |
| Key role | It lets you carry out transactions in the stock market | It makes sure that your stocks are safe |
| Nature | It functions like your bank current account. You need both trading and demat account to trade in the shares market | It works just like a bank savings account. Just like a savings account hold your money, demat account holds/stores your shares and securities in a digital format |
| Annual charges | Usually free, depends on the platform/brokerage | You have to pay this and it differs from one company to another |
| Unique number | It has a unique trading number that can be used to trade in the stock market | It has a unique demat number that can be used to identify your demat account |
| Additional Features | This account keeps you informed about the market movement as opinions of experts are posted regularly on the platforms. You can access the trading account whether the market is open or closed | This account protects your from unpredictable credits and debits by offering you the option of freezing your account for a particular time period. |
How to Open a Demat Account
If you wish to open a demat account, follow the steps mentioned below:
- Reach out to a depository participant (DP) or an agent of depository to get the application form for opening a demat account.
- Fill out the application form and submit the necessary documents like ID proof, address proof, etc.
- Sign the agreement that summarises the details of your duties and rights as an investor. Kindly note that you have the right to get a copy of the schedule and agreement for future reference.
- THe depository participant will open your demat account now and provide you with a demat account number, which is also called the Beneficial Owner Identification Number (BO ID).
How to Open a Trading Account
You can open a trading account by following the simple steps mentioned below:
- Select a firm or broker of your liking after you compare the service charges and facilities that they offer.
- Fill the trading account opening form that they provide. You will be required to submit your identification proof and address proof along with providing your KYC details.
- The firm/broker will now verify the details that you provided.
- You will receive the details regarding your new trading account and you can start trading.
Is a Trading Account Necessary to Open a Demat Account?
You need a demat account in order to open a trading account. Both the accounts are dependent on each other and are required to trade in the stock market. This is due to the fact that shares are available in digital format only. Therefore, whenever you make a transaction, the shares/securities will need a demat account for storage.
Is a Demat Account Necessary to Open a Trading Account?
You need a trading account to open a demat account. Trading account not only holds your securities, it can also be used to buy/sell and for transferring shares and securities. Without the trading account, a demat account will not be necessary. You need a trading account first and foremost to buy/sell shares and secondly, a demat account to store them.
The Demat account and trading account work in tandem together. In order to do equity trading, you need both these accounts. It is crucial that you pick a broker/firm that aligns with your trading goals. Make sure to research beforehand and compare the brokerage charges of different firms. It is recommended to open both demat and trading accounts with the same DP as it aids seamless trading. Trading in the stock market is subject to market risks and hence you have to be very careful.