Trading vs Demat account: What's the difference?

If you are beginning to get familiar with the stock market, then you may be aware of the basic requirements of investing money in stock exchanges. This involves having both a trading account and a Demat account. However, a large number of individuals are still confused about the differences between the two as they seemingly feature related properties.

Learning the differences between the two can be highly crucial as it will improve efficiency and when it comes to investing.

What is a Trading Account?

A trading account is an investment account that contains cash, securities, or other assets. These are perfect for investors who frequently buy and sell their securities. Additionally, they function as a link between an investor’s bank account and their demat account, and all purchases or sales result in a debit or credit to those accounts.

Investors can place orders to purchase shares through their trading account, which are subsequently processed by the appropriate stock exchange. On execution, the shares are subsequently credited to their Demat account, and a corresponding sum of money is debited from their bank account.

Benefits of a Trading Account

1) Ease in Usage
2) Provides Access to Multiple Stock Exchanges
3) Smooth and Seamless Transactions
4) Credible Information and Resources

What is a Demat Account?

A Demat account is a digital account for storing securities in a dematerialised/virtual format. It is useful for holding investments such as bonds, shares, government securities, insurance, mutual funds, and ETFs. This can help avoid the hassles of physical handling or maintenance of physical shares and relevant documents.

It is mandatory for investing in stock markets such as NSE and BSE but is not a prerequisite for mutual funds. However, its immense benefits can be quite helpful for investors looking to diversify and expand their investment portfolio.

Benefits of a Demat Account

1) Low Risk of Losing Documents
2) Cost-effectiveness
3) Quicker Settlement Process
4) Minimised Fraud/Forgery Risks
5) Avail Collateral Against Loans
6) Nomination Facility

Differences Between a Trading and Demat Account

Some of the major differences between a trading and demat account are:

Purpose: A trading account is used to buy/sell shares on the stock market, whereas a demat account is intended to hold securities in an electronic format.

Role: A Demat account's primary function is to provide the security required in a trading account for the purchase or sale of shares.

Nature: A Demat account is identical to that of a savings account. It enables investors to store their financial instruments in a dematerialised or electronic form that is debited and credited appropriately, similar to a savings account. In contrast, a trading account works more like a current bank account. To trade in the stock market, you must have a Demat account and a trading account.

Charges and Fees: On opening a Demat account, you will be levied annual maintenance charges, which vary across different service providers. Besides this, you might also be charged custodian or transaction fees. However, you will not be charged such fees for a trading account.

Identification: All Demat accounts feature a unique 16-digit number, while trading accounts have a unique number or ID attached to each one, depending on the stockbroker.

Issuing Entity: Depositories help issue Demat accounts via Depository Participants (DPs) such as NSDL and CDSL, while trading accounts are provided by stockbrokers registered under SEBI. The difference between CDSL and NSDL is their primary operating markets.

Can a Demat Account be Opened Without a Trading Account

Since a Demat Account and a Trading Account have their own features, it is not compulsory to open both accounts together. If you wish to trade only in futures, then a Demat account will not be required, but rather a trading account.

However, if you have signed up for an Initial Public Offer (IPO), and wish to keep only the shares, then only a Demat account will do. But, a trading account is required if you want to sell these shares.

When trading in equities, you will be mandated to have a Demat account. Therefore, considering your investment goals and purposes is crucial when opening either a Demat or trading account.

You may now have a better idea about how a Demat account and a trading account differ, along with their respective features and benefits.