Difference Between Demat Account and Trading Account

Making money in stock markets is not a gamble, but a process of systematic and scientific investments. It is important to be aware and equipped with the fundamentals of stock markets. The foremost step towards your trading journey is to open up a trading and demat account. Further, it is also important to know the difference between a Demat and a trading account.

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

Difference between Demat Account and Trading Account
  • Functional Difference: Demat account is used to hold securities in an electronic format whereas a trading account is used to buy/sell shares in the stock market.

  • Nature: A Demat account works just like a savings account. Like a savings account holds money, a Demat account allows investors to store financial instruments in a dematerialized or electronic form which are debited and credited accordingly. A trading account, on the other hand, functions more like your current bank account. You need to have both Demat as well as a trading account to trade in the stock market.

  • Key role: The key role of a Demat account is to ensure the safety you need in a trading account to purchase/sell shares.

  • Measurement of time: As a Demat account holds your shares, it is measured as a stock at a specific point in time i.e., the end of each financial year whereas a trading account is a flow statement reflecting your trading transactions measured over some time.

Opening a Demat Account

  1. To open a Demat account, contact your preferred Depository Participants (DP). The list is available on the websites of Central Depository Services Ltd and National Securities Depository Ltd.
  2. Fill out the account opening form and provide the documents on proof of address/identity.
  3. Sign the agreement. This agreement will provide the details regarding your rights and duties as an investor/DP.
  4. Congratulations! Your account has been opened. You will now receive a Beneficial Owner Identification Number.

Opening a Trading Account

Opening a trading account is a simple and hassle-free process. Keep the required documents handy to ensure that the process is completed smoothly. Follow these steps to open your trading account and begin your investment journey:

  1. Select a broker of your choice by comparing the different service charges and facilities offered.
  2. Fill out the account opening form. Here, you are required to provide KYC details, address proof, and ID proof.
  3. Now the authorities will verify your application.
  4. You will now receive the details regarding your trading account.
  5. Congratulations! You are all set to begin your journey of trading in stock markets.

Fees and charges for opening Demat and Trading Account

Opening a Demat Account entails Annual Maintenance Charges which differ from one service provider to another. You might also be required to pay transaction/custodian fees. For Trading Account, you are not required to pay any charges. You must remember that you can have multiple Demat and Trading accounts using a single PAN; all you need to do is pay the requisite AMC.

However, when you open a Demat account with IIFL securities, there are no account opening chargers and the AMC (Account Maintainance Charges) for the first year are also waived off.

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.

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.

Frequently Asked Questions Expand All

Ans.

Individual

  • Resident Individuals
  • NRIs
  • Minors (Only in case of demat account)

Non-individual

  • Corporate
  • Partnership firms
  • Bank
  • Mutual Funds
  • LLP (Liability Limited Partnership)
  • FII(Only trading account)
  • Registered/Unregistered trust
  • Registered/Unregistered society

Ans.India Infoline does not charge any account opening fee.(AMC) for 1 year. However, you will have to pay an AMC of Rs. 250 from second year onwards.

Ans.Individual beneficial owners must add a nominee while opening a Demat or trading account as this makes the process of transfer of shares much more convenient.

Ans.Yes, you can easily transfer shares from one Demat account to another. It can be done in two possible ways – manual and online.

Ans.Yes, you can open a joint Demat or trading account with India InfolineIIFL allows you to open your Demat or trading account in a single account name, multiple account names, or joint account name.

Ans. A trading account without a Demat account can only be used to trade in options or futures. If you wish to trade in equity, you must have both - Demat and Trading accounts.