For first-timers, investing or trading in the stock markets might sound difficult, but basic research and discipline are the key to conquering the world of shares.
A demat account and a trading account are the very first things one needs open to begin their journey in the stock markets. Let us understand them in detail before understanding how to invest and trade.
What is a Demat Account?
A demat account, which has derived its name from ‘dematerialization’, is used to store dematerialized, i.e. electronic, stock/shares of the company(ies) you have invested in. It was designed to replace the holding of physical share certificates. Once you purchase a stock through the markets, your demat account holds the shares until you choose to sell them, like a bank holds your money until you withdraw it.
You can open a demat account with any Depository Participant (DP) who is associated with either the NSDL (National Securities Depository Ltd) or the CDSL (Central Depository Services Ltd).
One needs to submit a duly filled application form, along with KYC (Know Your Customer) documents as well as bank details, and pay the due fee to open a demat account.
What is an Online Trading Account?
A trading account is used for trading securities in the stock markets. It helps create new buy/sell order and keeps a track of them as well. In layman’s language, it is used to trade (buy and sell) shares in the stock markets.
You can open a trading account with a stockbroker, who is usually a member of the NSE/BSE (National Stock Exchange/ Bombay Stock Exchange) or any other stock exchange, by simply filling up an application form and attaching the required KYC and bank documents.
Now, one might ask: what is the difference between a demat and a trading account. Let us find out.
Demat Account vs. Trading Account
Here are the key differences between a demat and a trading account:
· Primary Function:
Demat Account: The primary function of a demat account is to hold shares in a dematerialized (electronic) form.
Trading Account: The primary function of a trading account is to actually place the buy and sell orders for these shares.
Demat Account: To open a demat account, you need to submit a duly filled application form and have your KYC (Know Your Customer) done by submitting valid copies of the following documents:
o Identity Proof: Copies of PAN card, Aadhar card, Voter’s ID card, or Passport.
o Address Proof: Copies of Aadhar card, Voter’s ID card, Passport, or copies of the latest property tax receipt, electricity, or telephone bills.
Trading Account: To open a trading account, you need to have a demat account, a bank account, along with the duly filled application form, and the required KYC.
N.B: A PAN card is a must-have to open both demat and trading accounts.
· Contains Information About:
Demat Account: A demat account contains information on the number of shares one owns, including the quantity of shares as well as their cost price and the current market price.
Trading Account: A trading account stores data about the history of trades and records the gains and losses made in these trades.
· Opened With:
Trading Account: A trading account is opened with a stockbroker, who is a member of the NSE/BSE (National Stock Exchange/ Bombay Stock Exchange) or any other stock exchange.
Demat account: A Depository Participant who is associated with either the NSDL (National Securities Depository Ltd.) or the CDSL (Central Depository Services Ltd) can open a demat account.
In a nutshell, if you are looking to make only long-term investments, then you would just require a demat account; but if you are planning to trade in the stock markets, i.e. actively buy and sell stocks without holding them for long, then you would need to open both a demat and a trading account.