Besides numerous benefits and functions of a demat account, the fundamental purpose of opening a demat account is to hold the financial securities you bought in the stock market, whereas a trading account facilitates the online buy/sell of securities. The financial securities can be bonds, stocks, mutual funds units, exchange-traded funds, derivatives, commodities etc. Both accounts together make the online trading process secured, faster and more convenient.
What is a Demat Account?
Demat account is the online repository for your financial securities. You can not hold the securities in physical form; therefore, it is mandatory to open a demat account.
- Holding physical securities involve the risk of damage, torn, theft or lost and cumbersome paperwork. Such threats have been eliminated with the inception of demat accounts.
- You can maintain securities in the demat account easily and effortlessly.
How Demat Account Works
For easy understanding, the working system of your demat account is similar to your bank savings account, except for the product they deal with.
- In a bank account, your money gets credited and debited when you deposit and withdraw money. Similarly, in your demat account, your securities get debited or credited.
- Just like a bank account, you can open a free and zero-balance demat account. You need to own shares to open a demat account.
What is a Trading Account?
An online trading account facilitates a number of activities like making secured trading transactions, access stock exchanges, providing research reports by experts, etc. Among them, the main function of a trading account is to buy/sell financial securities in the stock markets like shares, mutual fund units, government securities, exchange-traded funds, etc. Your demat account gets credited and debited with the securities you buy/sell through your trading account.
- Before the digitalized trading process, stock markets were operated through an open outcry system. Investors had to be present physically in the stock market to buy/sell shares.
- Now using a trading account, investors can trade online from any place in the world.
- Trading account is not limited to National Stock Exchange (NSE), Bombay Stock Exchange (BSE). You can access multiple stock exchanges in one place like National Commodity and Derivatives Exchange (NCDEX), Multi Commodity Exchange (MCX), etc.
How Trading Account Works
Your trading is a link between your demat account and bank savings account. Whenever you require funds to buy financial securities, you need to transfer money from your linked savings account to your trading account, and these shares will be credited to your Demat account.
In the same way, whenever you sell these securities to book a profit, it will be credited to your savings account, and your demat account gets debited with the same securities. Thus, you need a trading account to place an online trade order in the stock market and transact for it.
Difference between Demat and trading account
Besides the functions of demat and trading accounts, both accounts are different and possess different account IDs in the name of an individual. The following are the factors differentiating both accounts.
- A trading account is required to buy or sell financial securities electronically, and a demat account is required to hold and maintain a record of these electronic securities.
- The demat account ensures the safety of an investor’s securities, whereas the trading account ensures a secured trading transaction.
- Demat services include annual maintenance charges, whereas trading accounts do not carry such charges.
- A demat account is necessary for those who want to invest and hold stocks for a long period. Whereas a day trader can trade using a trading account only. Demat account is the option for day traders. A trading account is necessary for derivative segment traders, especially those who deal in the cash segment.
Thus, with this understanding of the working system, you can determine your requirement for both accounts.