Introduction

With a lot of individuals moving to invest in the stock market, it is essential to understand the difference between a Demat Account vs Trading Account. These two accounts play a crucial role in facilitating your investments and trades in the financial market.

The major difference between a Demat and Trading Account is that a Demat account is used for storing securities in electronic format. At the same time, a Trading Account provides the interface to buy and sell shares. Despite the different roles, they work together to make trading and investing in the stock market possible electronically.

In this article, we will understand the specifics of Demat accounts and Trading accounts by exploring their differences, benefits, and how to choose the right account for your needs.

What is a Demat Account vs a Trading Account?

A Demat Account (short for Dematerialized Account) and a Trading Account are essential tools for investors in the stock market, particularly in countries like India. 

Here’s an explanation of each:

Demat Account

A Demat Account is used to hold financial securities in electronic form. It eliminates the need for physical certificates, thus providing a convenient and secure way to store your investments. Here are its key features:

1. Storage of Securities: It holds shares, bonds, government securities, mutual funds, and other financial instruments in electronic form.
2. Safety and Security: It reduces the risk of theft, loss, or damage associated with physical certificates.
3. Convenience: It makes it easier to buy, sell, and transfer securities, as these transactions are done electronically.
4. Dematerialization: It allows investors to convert their physical securities into electronic form.
5. Re-materialization: It also allows investors to convert electronic securities back to physical form if needed.

Trading Account

A Trade Account is used to place buy or sell orders in the stock market. It acts as a bridge between the investor’s Demat Account and their bank account. Here are its key features:

1. Execution of Trades: It is used to execute buy and sell orders of financial instruments on stock exchanges.
2. Interface with Stock Market: It provides an interface for investors to trade in the stock market.
3. Linked to Demat and Bank Account: It is typically linked to both the Demat Account (for holding securities) and the bank account (for fund transfers).
4. Real-Time Transactions: It facilitates real-time transactions, allowing investors to take advantage of market opportunities quickly.
5. Access to Trading Platforms: It gives access to online trading platforms, where investors can monitor the market, analyze trends, and execute trades.

How Do They Work Together?

1. Buying Securities:

• You can use your Trading Account to place a buy order.
• The required funds are debited from your linked bank account.
• The purchased securities are credited to your Demat Account.

2. Selling Securities:

• You can use your Trading Account to place a sell order.
• The securities are debited from your Demat Account.
• The proceeds from the sale are credited to your linked bank account.

Difference Between Demat Account vs Trading Account

A Demat Account and a Trading Account format are both crucial for participating in the stock market, but they serve different purposes. 

Here’s a detailed comparison highlighting the differences between the two:

1. Purpose

Demat Account:

• Holds financial securities (e.g., stocks, bonds, mutual funds) in electronic form.
• Acts as a digital storage space for your securities.

Trading Account:

• A trade account facilitates the buying and selling of securities on the stock exchange.
• Acts as a platform to execute trade transactions.

2. Functionality

Demat Account:

• Securely stores your securities.
• Mainly involves the credit (addition) and debit (removal) of securities.

Trading Account:

• A trade account is used for buying or selling orders.
• Involves the execution of buy/sell orders and the transfer of funds.

3. Interaction with Bank Account

Demat Account:

• Generally does not interact directly with your bank account.
• Only holds securities, and does not deal with money transactions.

Trading Account:

• Linked with your bank account for the transfer of funds required for buying or selling securities.
• Handles the financial aspect of your trades (e.g., deducting money for purchases or adding proceeds from sales).

4. Type of Transactions

Demat Account:

• Crediting of shares when you buy them, debiting of shares when you sell them.
• Storage and maintenance of your securities.

Trading Account:

• Placing a market order to buy shares, setting a limit order to sell shares.
• A trade account is used in executing trades and managing transactions in the stock market.

5. Need and Requirement

Demat Account:

• Essential for holding securities in a dematerialized form.
• Anyone who wants to hold and manage securities in electronic form.

Trading Account:

• Essential for trading in the stock market.
• Anyone who wants to actively trade (buy/sell) in the stock market.

6. Regulatory Aspect

Demat Account:

• Depositories such as NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) in India.
• Requires KYC (Know Your Customer) compliance and linking with a PAN card.

Trading Account:

• Stock exchanges and SEBI (Securities and Exchange Board of India).
• Also requires KYC compliance and linking with a PAN card.

Difference table: Demat Account vs Trading Account*

How to Open a Demat Account?

1. Choose a Depository Participant (DP):

• A DP is an agent of the depository (like NSDL or CDSL in India). Banks, brokerage firms, and financial institutions act as DPs.
• Research and choose a DP based on factors like fees, services, customer support, etc.

2. Fill Out the Application Form:

• Obtain the Demat Account opening form from the DP’s office or their website.
• Fill in the required details accurately.

3. Submit Required Documents:

• Identity Proof: PAN card (mandatory), Aadhaar card, passport, voter ID, or driving license.
• Address Proof: Aadhaar card, passport, utility bills, voter ID, or bank statement.
• Bank Proof: Canceled cheque or bank statement.
• Photographs: Passport-sized photographs.

4. In-Person Verification (IPV):

• Some DPs may require you to visit their office for in-person verification. Alternatively, they might offer online IPV through a video call.

5. Sign the Agreement:

• Sign an agreement with the DP outlining the terms and conditions of the service.
• You’ll receive a copy of the agreement for your records.

6. Processing and Account Number:

• The DP will process your application. Once approved, you will receive your Demat Account number, also known as Beneficial Owner Identification Number (BO ID).

How to Open a Trading Account?

1. Choose a Stockbroker:

• Select a reputable stockbroker or brokerage firm based on brokerage charges, services, trading platform, customer support, etc.

2. Fill Out the Application Form:

• Obtain the Trading Account opening form from the broker’s office or their website.
• Fill in the required details accurately by understanding the trading account format.

3. Submit Required Documents:

• Identity Proof: PAN card (mandatory), Aadhaar card, passport, voter ID, or driving license.
• Address Proof: Aadhaar card, passport, utility bills, voter ID, or bank statement.
• Bank Proof: Canceled cheque or bank statement.
• Income Proof: For trading in derivatives, income proof like salary slips, IT returns, or bank statements may be required.
• Photographs: Passport-sized photographs.

4. In-Person Verification (IPV):

• Similar to the Demat Account, some brokers may require IPV either in-person or online.

5. Sign the Agreement:

• Sign an agreement with the broker outlining the terms and conditions of the trading service.
• You’ll receive a copy of the agreement for your records.

6. Link Bank and Demat Account:

• Link your bank account and Demat Account with the Trading Account to facilitate fund transfers and securities transactions.

7. Receive Login Credentials:

• Once the application is processed and approved, you will receive your Trading Account login credentials.
• These credentials will allow you to access the trading platform provided by the broker.

Read More: Minor Demat Account

Combined Account Opening

Integrated Account Opening: Many DPs and brokers offer integrated account opening services where you can open both Demat and Trading Accounts simultaneously. This can simplify the process and ensure seamless transactions between the two accounts.

Online Account Opening: Many brokers and DPs offer online account opening facilities where you can complete the entire process digitally, including document submission and IPV.

Choosing Between Demat and Trading Account

Choosing between a Demat Account and a Trading Account is not typically an either-or decision, as both accounts serve different purposes and are often used together for stock market activities. However, understanding their distinct roles can help you determine which one you need based on your investment goals.

Here’s a breakdown to help you decide:

1. Demat Account

A Demat Account is primarily for holding financial securities in electronic form.

Who Needs It?

• Investors who want to store their stocks, bonds, mutual funds, and other securities safely in an electronic format.
• Individuals looking to hold their investments long-term without the need for frequent trading.

Key Features:

• Safety: Eliminates the risk of loss, theft, or damage associated with physical certificates.
• Convenience: Simplifies the management of your portfolio with easy transfer and dematerialization of securities.
• Maintenance: Requires annual maintenance fees but no transaction costs for holding the securities.

Use Case:

If you are primarily an investor looking to buy and hold securities over the long term, a Demat Account is essential.

2. Trading Account

A Trading Account is used to facilitate buying and selling of securities on the stock exchange.

Who Needs It?

• Active traders frequently buy and sell securities to take advantage of market fluctuations.
• Individuals interested in intraday trading or short-term investments.

Key Features:

• Execution: Enables you to place buy and sell orders in the stock market.
• Integration: Usually linked with your bank and Demat Accounts for seamless transactions.
• Real-Time Access: Provides access to online trading platforms for real-time market data and trading activities.

Use Case:

If you plan to actively trade in the stock market, a Trading Account is necessary to execute your transactions.

When You Need Both?

Integrated Usage: Most investors and traders need both accounts to fully participate in the stock market. The Demat Account holds the securities, while the Trading Account is used to execute the trades.

Seamless Transactions: When you buy shares, the Trading Account facilitates the purchase, and the shares are credited to your Demat Account. Conversely, when you sell shares, the Trading Account processes the sale, and the shares are debited from your Demat Account.

Charges Associated with Demat account vs Trading Account

Demat Account: Involves account opening fees, annual maintenance charges, transaction fees for debiting securities, and dematerialization/rematerialization fees.

Trading Account: Includes account opening fees, brokerage charges, transaction fees, GST, STT, stamp duty, SEBI turnover fees, and DP charges.

Refer to our full blog demat account charges for more info. But here are the details of charges associated with a Trading Account.

1. Account Opening Fee

Some brokers charge a fee to open a Trading Account, though many waive this fee to attract new customers.

2. Brokerage Charges

• Equity Delivery: Brokerage on buying and selling stocks to hold for more than one day.
• Equity Intraday: Brokerage on buying and selling stocks on the same day. Intraday rates are usually lower than delivery rates.
• Futures and Options (F&O): Brokerage fees for trading in the derivatives segment.
• Other Segments: Different brokerage charges may apply for commodities, currencies, and mutual funds.

3. Transaction Charges

Fees charged by stock exchanges for executing trades. This is a small percentage of the transaction value.

4. Goods and Services Tax (GST)

A tax levied on brokerage and transaction charges. The current GST rate is 18%.

5. Securities Transaction Tax (STT)

A tax levied on the buy and sell transactions of securities. The rate varies for different types of transactions, such as equity delivery, intraday, and F&O.

6. Stamp Duty

A government tax on the total turnover of the trade. The rate varies by state in India.

7. SEBI Turnover Fees

A fee levied by the Securities and Exchange Board of India (SEBI) on the total turnover of the trade.

8. Depository Participant (DP) Charges

Fees for settlement of buy and sell transactions. These charges are typically levied by the depository (NSDL or CDSL) and collected by the broker.

Conclusion

Are you still confused about which is the best in Demat Account vs Trading Account? 

The choice between a Demat account and a Trading account depends on your individual preferences and investment strategy. Both accounts serve different purposes and play distinct roles in the stock market ecosystem. Evaluate your needs, conduct thorough research, and seek advice from financial experts to make your final decision.

Would you consider an Open Demat Account where the charges are less and benefits are more? If yes then don’t look any further. Open a Demat and Trading Account with Jainam Broking Limited Now!