Basic differences between a Demat account and a trading account

Investing in stock markets has become a rage, especially among millennials. Today, the new-age trading apps have put the financial markets in consumers’ pockets. It does help that technology has enabled market transactions to be carried out at the click of a button.

A user can transact from his home or office using his mobile phone while commuting or even when holidaying.

How to start trading online?

A user needs two different accounts to start trading in the digital world – a Demat account and a trading account.

Government regulations allow the user to open these accounts with different brokers. But for ease of operations, it is advisable to choose a broker who offers services of both these accounts with the best features associated with each.

How is a Demat account different from a trading account?

Let us understand the fundamental differences between a Demat account and a trading account.

What is a Demat account in the stock market?

Gone are the days when stocks purchased were in the physical form. Such physical shares were prone to be damaged or lost. Transferring these shares from a seller to a new buyer was a long and tiresome process with an undue amount of paperwork.

Dematerialised accounts are the answer for all these worrisome features. They ensure safety and complete ease in buying and selling transactions. Shares are now held electronically in government-regulated Depositary Participants, known by the acronym ‘DPs’.

How can a Demat account help you?

Demat accounts are similar to your bank account. But instead of money, what is stored here are your financial assets. You can safely store financial instruments like shares, mutual funds, government securities, and ETFs in your Demat account. All Demat accounts are differentiated with a unique account number. There are two Depository Participants in India. Central Depositary Services (India) Limited (CDSL) and National Securities Depositary Limited (NSDL).

What is a trading account?

While a Demat account enables you to hold your assets, the trading account enables you to transact in the financial markets and buy or sell the financial instruments. A unique number also identifies trading accounts. Many brokers in India offer trading accounts, allowing you to research and suit the best service provider for your needs.A trading account is needed for equity, mutual funds, futures, options, commodities, currency, etc.

How to start your investing journey?

So to start your journey in financial markets, three key accounts are needed – Demat account, trading account, and bank account. You first need to transfer funds from your bank account to the trading account to buy any security. Then the buying is carried out from the trading account. The asset bought is then stored in your Demat account. The exact process is reversed in the case when a financial instrument you own in your Demat account is sold.

Are there any associated charges?

Both the Demat account and the trading account have certain charges attached. For operating a Demat account, Annual Maintenance Charges (AMC) need to be paid. Sometimes there could be specific custodian or transaction fees payable as well. In contrast, a trading account involves a variety of charges. Depending upon the nature of the transaction (intraday or delivery) and the type of security involved (equity, mutual fund, futures, options, commodity, currency, etc.), certain charges like brokerage GST, STT, stamp duty, etc., are payable.

Parting thoughts

With digitisation, the process has become seamless, and the entire operation can be concluded just by pressing a couple of buttons on your laptop or your mobile phone.

So to embark on your journey into financial markets, both the Demat account and the trading account are essential.

Due diligence is necessary to select the right broker best suited for your needs. For selecting the broker who offers the best services for both accounts, it is vital to check features like the broker’s credibility, the ease of operation of the trading platform, reliability and speed of the platform, various associated charges and other such attributes.

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