You may be confused about the difference between a demat account and a trading account whenever you deal in stock market. Both accounts are crucial for trading in the stock market, but they serve different functions.
You may be wondering why two different types of accounts are needed? Many people still think both are one and the same.
In this article, we will do comparison of demat and trading accounts and will try to understand the roles of each account.
What is a Demat Account?
A digital account, commonly known as a demat account, is a computerized mechanism that securely holds your shares in digital format.
The purpose of a demat account is to completely eliminate the need for physical share certificates, thereby making the trading process in the stock market more seamless and efficient.
Every time you initiate the purchase or sale of shares, the transactions are processed through your demat account.
The shares that you purchase are credited to your demat account, and conversely, the shares that you sell are debited from it.
It’s quite effortless and easy to check the details of all your holdings, including the exact quantity and the value of the shares in your demat account statement.
Also Read : Advantages and Disadvantages of Demat accounts that you should know
What is a Trading Account?
A trading account is a specialized account that helps you in the buying and selling of a wide variety of shares and securities that are being traded in the stock market.
It’s essential to recognize that a trading account is quite different from a demat account, even though they are frequently linked together in a mutually beneficial relationship.
With a trading account, you can place orders to either purchase or sell shares and securities. The transactions are carried out through a stockbroker or a trading platform that connects you to the stock exchanges.
Whenever you place an order, the broker or the platform carefully examines if you have sufficient funds in your account and executes the order promptly if the price happens to be within the bounds of your specified limit.
Differences Between Demat and Trading Accounts
Basically demat account is a storage machanism and trading account is a transaction mechanism.
While demat and trading accounts are often used together, they serve different purposes and have distinct features. Below are some of the key contrasts between the two accounts :
- Purpose: Demat accounts are mainly utilized to securely hold your shares and securities in an electronic format, while trading accounts are primarily used to engage in buying and selling of shares and securities.
- Asset types: Demat accounts are designed to store your shares and securities, whereas trading accounts are equipped to manage your funds and facilitate order placements.
- Usage: The precise function of a demat account is predominantly confined to the settlement of trades, while trading accounts are extensively leveraged to execute trades.
- Fees and charges: Demat accounts typically attract maintenance fees and transaction charges related to investing, while trading accounts usually brokerage fees and other transaction-related charges related to trading.
- Documentation required: To open a demat account, one needs to provide their PAN card, identity proof, and address proof. In contrast, to open a trading account, one must present the same documents along with income proof and bank account details.
- Investment options: Demat accounts offer access to a diverse range of securities such as shares, bonds, mutual funds, and other securities, while trading accounts allow you to trade in derivatives, commodities, and currencies.
Which Account Do You Need?
Nowadays, all brokers insist on opening both demat and trading account together and it is called 2-in-1 account.
But It is possible to open only either demat account or trading account depending on your requirement. But usually it is not recommended.
It is also possible to open demat account and trading account with two separate brokers of our choice and then link them.
The decision of whether to choose a demat account or a trading account depends solely on your investment goals and trading approach.
If you’re a passive investor who plans to hold shares and securities for an extended period, then a good demat account would be a suitable choice. On the other hand, if you’re an active trader who is always searching for opportunities to quickly buy and sell shares intraday, or derivatives then a trading account would be ideal.
It’s crucial to select a trustworthy broker who offers both demat and trading accounts. Prioritize a broker who provides low fees, user-friendly trading platforms, and exceptional customer support.
Some of the top brokers in India include Zerodha, Upstox, and Angel One, among others.
Related Read : Can a Person Have Multiple demat account in India?
Conclusion
In conclusion, demat and trading accounts are both essential for trading in the stock market. Despite some similarities, they operate differently and possess distinct features.
Knowing the difference between demat and trading account will help you to take informed decision and choose the account which will be right for you.
That being said, it is always advisable to open both the accounts with same stock broker for smooth operation and convenience.
Frequently Asked Questions (FAQs) :
Q. What is the difference between a demat account and a trading account?
A. The main difference between a demat account and a trading account is that a demat account is used to hold and store shares and securities in a digital format, while a trading account is used to buy and sell those shares and securities in the stock market
Q. Can I use one account for both holding and trading shares?
A. No, you cannot use one account for both holding and trading shares. You need to have separate demat and trading accounts.
Q. Is it possible to have multiple trading accounts linked to a single demat account?
A. Yes, it is possible to have multiple trading accounts linked to a single demat account
Q. Can I have a demat account without a trading account?
A. Yes, you can have a demat account without a trading account. This is useful if you only want to hold shares and securities for the long term and not actively trade in the market.
Don’t Miss to Read Below Demat Account Informative Articles:
- Is Demat Account Safe? 5 Safest Demat Account In India
- Minimum Amount Required For Opening A Demat Account
- Understanding the Advantages and Disadvantages of Demat Accounts
- How To Close Your Demat Account Online?
- Demat Account Number Format : How To Find Your Demat Account Number?
- Types of Demat Account in India
- Can a Demat Account Be Opened Without a PAN Card?
- How to Open a Joint Demat Account – Benefits
- Can a Person Have Multiple Demat Account in India? Is it Legal?
- How to Add a Nominee to Your Demat Account?
- How to freeze and unfreeze your demat account
- Basic Service Demat Account – Benefits & Drawbacks
- When Are Bonus Shares Credited in Demat Account?
- How to Convert Shares in Physical Format to Demat Format
- What is Demat Account Holding Statement and How to Download it?