Difference Between Demat and Trading Account
If you’re new to the world of investing, you may have come across the terms “demat account” and “trading account”. While both are essential for investing in the stock market, they serve different purposes. In this post, we’ll be discussing the key differences between demat and trading accounts, including their functions, features, and benefits.
We’ll also cover the documents required to open each account and the charges associated with them. By the end of this post, you’ll have a clear understanding of the difference between demat and trading accounts and how to choose the right one for your investment needs.
Understanding Demat and Trading Accounts
A Demat account and a trading account are two different types of investment accounts that serve different purposes. A demat account is an account that holds shares, bonds, government securities, and mutual funds in electronic format. On the other hand, a trading account is used to buy or sell shares in the stock market.
When an investor buys shares in the stock market, the shares are credited to their demat account. Similarly, when an investor sells shares, the shares are debited from their demat account. Thus, a demat account acts as a depository for the shares that an investor holds.
A trading account, on the other hand, is used to place buy or sell orders in the stock market. A broker is required to open a trading account. A broker is an individual or a firm that acts as an intermediary between the investor and the stock market. The broker charges a fee for their services, which is known as brokerage.
An investor can buy or sell shares in the stock market through their trading account. The shares that an investor wants to buy are debited from their demat account and credited to their trading account. Similarly, the shares that an investor wants to sell are debited from their trading account and credited to their demat account.
In summary, a demat account is used to hold shares in electronic format, while a trading account is used to place buy or sell orders in the stock market. A demat account is necessary for an investor to invest in the stock market, while a trading account is necessary for an investor to trade in the stock market.
Opening a Demat and Trading Account
To invest in the stock market, one needs to open a Demat account and Trading account. The account opening process is mandatory as per the regulations of the Securities and Exchange Board of India (SEBI).
To open a Demat and Trading account, one needs to approach a registered stockbroker. The stockbroker will provide an account opening form that needs to be filled with all the necessary details. The form will require information such as the investor’s name, address, PAN Card number, proof of identity, proof of address, and a cancelled cheque from the investor’s savings account.
The account opening form needs to be submitted along with the required Documents, such as address proof, proof of identity, and a canceled cheque. The stockbroker will then verify the documents and proceed with the account opening procedure.
The charges for opening a Demat account and Trading account vary from one stockbroker to another. The opening charge for a Demat account ranges from Rs. 200 to Rs. 1000, while the opening charge for a Trading account ranges from Rs. 300 to Rs. 1000.
The account opening process can be done online as well. Many stockbrokers provide online account opening facilities. The investor needs to fill in the details online and submit the required documents. The stockbroker will verify the documents and proceed with the account opening procedure.
Once the Demat and Trading account is opened, the investor can start trading in the stock market. The investor can buy and sell stocks, participate in IPOs, and invest in mutual funds. It is important to note that investing in the stock market involves risk. The investor needs to be cautious while investing and should be aware of the risks involved.
In conclusion, opening a Demat and Trading account is mandatory for investing in the stock market. The investor needs to approach a registered stockbroker, fill in the account opening form, submit the required documents, and pay the opening charges. The account opening process can be done online as well. The investor can start trading in the stock market once the account is opened.
Role and Functionality of Demat and Trading Accounts
Demat and trading accounts are essential for stock market investing. A demat account holds securities in electronic form, while a trading account allows users to buy and sell stocks in the stock market.
The primary role of a demat account is to hold securities, such as equities, bonds, futures, options, ETFs, and other financial instruments, in digital form. When a user buys shares, the securities are credited to their demat account, and when they sell shares, the securities are debited from their account. The demat account eliminates the need to hold Physical shares, which can be lost, stolen, or damaged.
A trading account, on the other hand, is a unique account that allows users to conduct trading transactions in the stock market. It acts as a link between the user’s demat account and their bank account. When a user places a buy order or a sell order, the trading account is used to execute the transaction. The trading account also provides users with a unique trading ID, which is used to track their trading activity.
Users can link their current bank account to their trading account to facilitate transactions. They can also use an online trading platform provided by their broker to place buy and sell orders. The trading account also allows users to view their portfolios, track their trading history, and monitor the stock market.
Both demat and trading accounts are subject to charges, such as brokerage charges, depository participant charges, and other fees. Users must also comply with KYC details and beneficial owner identification number (BOID) requirements.
In summary, demat and trading accounts play critical roles in stock market investing. The demat account holds securities in digital form, while the trading account allows users to buy and sell stocks in the stock market. Users can link their bank account to their trading account, use an online trading platform, and monitor their portfolio and trading history.
Differences Between Demat and Trading Accounts
A demat account and a trading account are two distinct types of accounts that serve different purposes in the Indian stock market. While a trading account is like a store where one can buy or sell shares, a demat account is like a storage place where the shares are kept. Here are some of the key differences between the two accounts:
Definition
A demat account is an electronic account that holds the shares of an investor in a dematerialized form. In contrast, a trading account is an account that allows an investor to buy and sell securities in the stock market.
Purpose
The primary purpose of a demat account is to hold the shares of an investor in an electronic form, eliminating the need for physical share certificates. On the other hand, the primary purpose of a trading account is to facilitate the buying and selling of securities in the stock market.
Role
A demat account acts as a repository for the shares of an investor, which are held in an electronic form. In contrast, a trading account facilitates the execution of trades in the stock market.
Risks
A demat account carries the risk of loss of shares due to hacking, technical glitches, or other issues. In contrast, a trading account carries the risk of losses due to market fluctuations and other factors.
Ownership
A demat account is owned by the investor, and the shares held in the account are owned by the investor as well. In contrast, a trading account is owned by the broker or the trading member.
Regulation
Both demat and trading accounts are regulated by the Securities and Exchange Board of India (SEBI). However, the risk management system (RMS) for trading accounts is more stringent than that for demat accounts.
Here is a table summarizing the key differences between demat and trading accounts:
| Demat Account | Trading Account |
|---|---|
| Holds shares in electronic form | Facilitates buying and selling of securities |
| Acts as a repository for shares | Executes trades in the stock market |
| Carries risk of loss of shares | Carries risk of losses due to market fluctuations |
| Owned by the investor | Owned by the broker or trading member |
| Regulated by SEBI | Regulated by SEBI |
| RMS less stringent than for trading accounts | RMS more stringent than for demat accounts |
Understanding the differences between demat and trading accounts is crucial for investors looking to participate in the Indian stock market. By knowing the purpose, role, risks, ownership, and regulation of these accounts, investors can make informed decisions about their investments.
Charges and Brokerage Rates in Demat and Trading Accounts
One of the most important factors to consider while choosing between a Demat account and a Trading account is the charges and brokerage rates associated with them. Here’s a breakdown of the charges and brokerage rates in Demat and Trading accounts:
Demat Account Charges
- Account Opening Charges: Most brokers charge a one-time fee for opening a Demat account. This fee varies from broker to broker and can range from as low as Rs. 100 to as high as Rs. 1,000.
- Annual Maintenance Charges (AMC): Brokers charge an annual maintenance fee for maintaining a Demat account. This fee can range from Rs. 300 to Rs. 1,000 per year.
- Transaction Charges: Brokers charge a fee for every transaction that takes place in a Demat account. This fee is usually a percentage of the transaction value and can range from 0.02% to 0.05%.
- Dematerialization Charges: If you want to convert your physical shares into electronic form, you will have to pay a dematerialization fee. This fee can range from Rs. 5 to Rs. 25 per certificate.
- Rematerialization Charges: If you want to convert your electronic shares into physical form, you will have to pay a rematerialization fee. This fee can range from Rs. 10 to Rs. 25 per certificate.
Trading Account Charges
- Account Opening Charges: Most brokers charge a one-time fee for opening a Trading account. This fee varies from broker to broker and can range from as low as Rs. 100 to as high as Rs. 1,000.
- Annual Maintenance Charges (AMC): Brokers charge an annual maintenance fee for maintaining a Trading account. This fee can range from Rs. 300 to Rs. 1,000 per year.
- Brokerage Charges: Brokers charge a fee for every transaction that takes place in a Trading account. This fee is usually a percentage of the transaction value and can range from 0.01% to 0.05%.
- Securities Transaction Tax (STT): STT is charged on every transaction that takes place in a Trading account. This tax is levied by the government and is usually 0.1% of the transaction value.
- Goods and Services Tax (GST): GST is charged on the brokerage fee and is usually 18%.
It is important to note that the charges and brokerage rates mentioned above are subject to change and may vary from broker to broker. It is advisable to check with your broker before opening a Demat or Trading account.
Transfer and Transaction Methods in Demat and Trading Accounts
When it comes to transferring and making transactions in Demat and Trading Accounts, there are a few key differences to keep in mind.
Demat Account Transactions
In a Demat Account, transactions involve the transfer of securities from one account to another. This can include buying or selling shares, or transferring them to another account. Transactions in a Demat Account can be done through the following methods:
- Delivery Transactions: This is when securities are transferred from one Demat Account to another. It can be done through the stock exchange or through off-market transfer.
- Off-Market Transactions: This is when securities are transferred from one Demat Account to another outside of the stock exchange. This can be done through a broker or directly between two parties.
Trading Account Transactions
In a Trading Account, transactions involve the buying and selling of securities in the stock market. Transactions in a Trading Account can be done through the following methods:
- Trading Transactions: This is when securities are bought or sold in the stock market through a broker.
- Sell Orders: This is when securities are sold in the stock market through a broker.
In both Demat and Trading Accounts, transactions can be done online or offline, depending on the preference of the account holder. It is important to note that while a Demat Account can hold securities, it cannot be used to make transactions in the stock market. A Trading Account, on the other hand, can be used to make transactions in the stock market, but it cannot hold securities.
Overall, understanding the different transfer and transaction methods in Demat and Trading Accounts is essential for anyone looking to invest in the stock market. By having a clear understanding of how these accounts work, investors can make informed decisions about buying, selling, and transferring assets.
Investment Options Through Demat and Trading Accounts
Demat and trading accounts offer a wide range of investment options to individuals looking to invest in the stock market. With a demat account, investors can hold securities such as shares, bonds, futures, options, and mutual funds in electronic format. On the other hand, a trading account facilitates transactions of the securities held in the demat account.
One of the primary investment options available through a demat account is equities or stocks. Investors can buy and sell shares of companies listed on the stock market through their demat and trading accounts. They can also invest in initial public offerings (IPOs) and follow-on public offers (FPOs) through these accounts.
Apart from equities, investors can also invest in bonds and government securities through their demat accounts. Bonds are fixed-income securities that offer a fixed rate of return over a specified period. Government securities are issued by the government and are considered to be a safe investment option.
Another investment option available through demat accounts is mutual funds. Mutual funds are professionally managed investment schemes that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, and other financial instruments.
Trading accounts offer investors the option to trade in equities, derivatives, currencies, and exchange-traded funds (ETFs). Derivatives such as futures and options are financial instruments that derive their value from an underlying asset such as stocks or commodities.
Investors can use their trading accounts to place buy and sell orders in the stock market. They can also use technical and fundamental analysis to make informed investment decisions.
In conclusion, demat and trading accounts offer investors a wide range of investment options in the stock market. From equities and bonds to mutual funds and derivatives, investors can choose from a variety of financial instruments to build a diversified portfolio.
FAQ Difference Between Demat and Trading Account
What is the difference between a trading account and a demat account?
A trading account is a platform that allows investors to buy and sell securities such as stocks, bonds, and mutual funds. On the other hand, a demat account is a digital locker that holds the securities bought by the investor. While a trading account facilitates transactions, a demat account holds the securities in electronic form.
How do I open a trading account?
To open a trading account, an investor needs to choose a broker, fill out an application form, provide necessary documents such as PAN card, Aadhaar card, bank account details, and address proof, and pay the account opening fee. Once the account is opened, the investor can start trading.
Is it necessary to have both a trading account and a demat account?
Yes, it is necessary to have both a trading account and a demat account to invest in the stock market. The trading account is used to place buy and sell orders, while the demat account is used to hold the securities bought by the investor.
Can I trade without a demat account?
No, an investor cannot trade without a demat account. The demat account is necessary to hold the securities bought by the investor in electronic form.
Which is better, a demat account or a trading account?
Both a demat account and a trading account are essential for investing in the stock market. While a trading account facilitates transactions, a demat account holds the securities in electronic form. Therefore, both accounts are equally important.
Who is eligible to open a demat and trading account?
Any Indian citizen above the age of 18 years can open a demat and trading account. Non-resident Indians (NRIs) and foreign nationals are also eligible to open these accounts subject to certain conditions.
