What is the difference between a demat account and trading account?

Most new investors, at first, fail to realize that a trading account and a demat account are different things altogether. While the trading account captures your flows, the demat account holds stocks that you own.

Dec 23, 2018 03:12 IST India Infoline News Service

Many investors, during their initial stints in the financial markets, fail to realize the subtle differences between a trading and a demat account. When you start trading in equities through your broker, you normally open a trading-cum-demat (TCD) account. While a trading account captures your transactions and is used to, as the name suggests, trade in the stocks, the demat account acts like a bank account and hold stocks that you already own.
 
Before we get into the specific comparison of demat and trading accounts, let us understand how the process flow works in the above two cases.
 
 
 
The above chart explains the process flow between the trading, demat, and the bank account during a buy or sell trade.
 
Demat account is stock and trading account is a flow
 
Demat accounts hold shares and securities in electronic custody. A demat account can be compared with your savings account at the bank. The only difference is that the bank account holds cash and the demat account holds shares and other securities. Apart from shares, the demat account can also hold bonds, ETFs, mutual funds, gold bonds, and other similar assets with a unique ISIN number. An important point here is that the demat account signifies ownership as it can only hold assets that you own.
 
A trading account, meanwhile, is for executing transactions. Even if you are holding shares in your demat account, you need a trading account to sell them or to buy more shares. Selling shares directly from the demat account is not permitted. However, you don’t need a trading account for selling bonds or gold bonds and these can be directly sold from your demat account itself. In the case of intraday trades and futures and options trades, there is no impact on the demat account as these are not assets. They stay in the trading account only.
 
Can you have a demat account without a trading account and vice versa?
 
To begin with, markets regulator SEBI does not compel investors to have a trading account and a demat at the same place, although it is more convenient. However, can you have a demat account without a trading account? You surely can. In the case you invest in IPOs, then you require only a demat account to get the shares credited. However, you would need a trading account if you wanted to sell these shares. Similarly, if you get shares as a gift from your parents, then you do not need a trading account and you can get them credited through an off-market transfer. You will still require a trading account if you plan to sell these shares.

 
Can you have a trading account without a demat account? If you only plan to trade in futures, options, and currency derivatives, then you don’t need a demat account. A trading account alone will suffice.
 
But do investors need a demat account if they only plan to trade intraday? Sebi regulations insist on a demat account for any trade in equities. Thus, demat account is mandatory even if you only intend to trade intraday in equities.
 
Differences in cost implications for demat and trading accounts

 
There is no cost involved in maintaining a trading account although brokerage and statutory charges are levied when you execute transactions. Statutory charges include GST, STT, turnover tax, exchange charges, and stamp duty. However, even maintaining an idle demat account entails a cost. Account opening charges have been removed but there is an annual maintenance charge (AMC) that is billed to you. This could vary from Rs500 to Rs800. The charge on credits to your demat account has been removed but each time you sell shares and they get debited from your demat account, there is a fixed charge payable. In addition, there are charges for rejection of a delivery instruction slip (DIS) or for rejection of demat request form (DRF) as well as a per folio cost to dematerialize shares.
 
Understanding the process flow of trading and demat accounts
 
How do you buy shares in the stock market? First, you fund your trading account by debiting your bank account via NEFT/RTGS/IMPS or through a payment gateway. This becomes the margin to buy shares.
 
Any shares not squared off as an intraday trade, go for delivery. By T+1 date, you will have to fund the balance delivery amount. On T+2, you will get a credit into your demat account and then you are free to sell the shares whenever you want. You can only sell clear (not marked) shares from your demat account. By 11 am on T+1, you have to give the DIS to the broker for processing the demat debit or you can instruct online in case of internet trading.
 
On T+1 date, the shares get debited to your demat account. By the end of T+2, you get credit for the value of shares sold into your bank account. This complete the loop in the trading / demat process!

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