What is the difference between a demat and a trading account?

A demat account is an account into which you can store securities like stocks, bonds, mutual funds, and other forms of financial instruments in digital formats. This means never having to acquire the physical certificates, thereby converting the ownership of securities into streamlined trading and investing, along with the transfer of such ownership over the stock market.

A demat account is a secure repository for several financial instruments:

Equity shares

●      Exchange-traded funds (ETFs)

●      Govt bonds

●      Corporate bonds

●      Mutual fund units

●      Debentures

In India, two central depositories maintain demat accounts: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). Your broker acts as an intermediary between these depositories and you. A demat account resembles a bank account in terms of what it does. A bank account is for the money that belongs to you, while a demat account accounts for the securities owned by you, reflecting credits when you purchase shares and debits when you sell.

What Is a Trading Account?

A trading account needs to be an interface through which you buy or sell your securities from the market. While holding your shares, the demat account deals with the trading accounts that process these transactions.

A trading account is just a way to link your demat account and bank account:

The fund goes from your bank account to buy shares.

Shares shift or move from/to your demat account once you sell/buy.

You place a buy/sell transaction through your broker, say using their trading platform such as a mobile app or desktop software, and that trade will be charged at the stock exchange (typically, NSE/BSE). The shares are then transferred to/from your demat account.

A trading account allows the investor also to trade in:

A demat account is just to store securities and the trading account would be for transaction execution.

Key Differences between Demat and Trading Accounts

While both accounts are important for participating in the stock market, they serve entirely different purposes. Here are the key differences:

1. Purpose-

Demat Account:

To keep your securities in a digital form.

Trading Account:

To buy and sell securities in stock exchanges.

2. Functionality

Demat Account:

Acts as a digital locker for shares and financial instruments attached to it.

No buying or selling can be conducted directly through it.

Trading Account:

An active transactional interface through which orders may be placed, facilitating a trade execution, but does not store your holdings.

3. Type of Activity

Storage: Demat Account

Execution: Trading Account

4. Transaction Flow

Example (buying shares):

Place the buy order through the trading account.

Money debited from the bank.

Shares credited into your demat account.

Example (selling shares):

A sell order was placed through the trading account.

The shares are debited from your demat account.

Credits the sales amount into your bank account.

5. Applicability

Demat Account:

Mandatory in all cases of equity investment on a delivery basis.

Trading Account:

Mandatory for all buys/sells of stocks (Delivery and Intraday) as well as F&O and commodities.

6. Charges

Demat Account Fees:

Annual Maintenance Charges (AMC)

Custodian or DP charges

Trading Account Fees:

●      Brokerage charges

●      Transaction charges

●      Exchange fees

●      GST

Every broker has a unique fee structure.

Why Do You Need Both Accounts?

You cannot have a standalone account for equity investing:

You need a trading account to place buy/sell orders.

You need a demat account where the purchased securities should be stored.

Think of it this way:

The trading account is the gateway, and the vault is a demat account.

However, if the only trading undertaken involves derivatives (F&O), a demat account is not necessary. Nevertheless, most brokers would always recommend opening both so as to smooth most activity.

Common Misconception: Can One Replace the Other?

Among the fresh investors pouring into the new market, the most common misconception is that a demat account can serve as the only requirement to engage in trading. But the demat account is a mere storehouse of shares, which does not really communicate with the stock exchange. The same goes for the trading account, which is not a share depository. That is why both accounts could replace each other – they complement each other for smooth trading and investing purposes.

Conclusion

Differentiating between demat and trading accounts is necessary at a fundamental level for anyone new to starting out in investments. A demat account houses securities, while a trading account gives you the option to trade them in quotations. The two accounts, together, make an essential base of the modern stock market investment process in India.