To trade in financial instruments such as stocks, bonds, mutual funds, IPO etc., an investor needs a demat account and a trading account. While a demat account is used to hold securities in the dematerialised form, the trading account is like an intermediary between the bank account and the demat account of an investor.
A demat account is helpful in increasing the security of transactions and making the whole process faster as compared to trading physical share certificates. For more in-depth knowledge on a trading and a demat account, let’s have a look at the top differences between the two accounts.
A significant distinction between the two accounts is the function that they perform in trading. A demat account enables investors to keep their financial instruments in an electronic format. An investor can also convert their securities from electronic format to physical format with the help of the re-materialisation feature. A trading account, on the other hand, is utilised to buy and sell securities by debiting them from your demat account.
A trading account is used to trade financial securities or stocks in the market after withdrawing them from the demat account. A demat account is similar to a bank account wherein you collect the securities or stocks that you’ve purchased from the share market. Therefore, a trading account is required when you want to sell the stocks in the stock market and a demat account acts as a storage account for all your current and future investments.
Both trading and demat account are indispensable for any trading in the share market. When an investor buys the shares of any business, they use a trading account to do so. The payment for the purchase is debited from the bank account, and subsequently, the shares are displayed in the demat account.
Likewise, when an investor sells shares via a trading account, the same gets debited from the demat account and are then sold in the market. The returns of this trade are credited in the linked bank account. Therefore, in order to trade in the stock market, it is mandatory for an investor to hold both trading account as well as demat account.
If you apply for an IPO (Initial Public Offering), then you only require a demat account to maintain the shares on the allotment thus made. If you just want to keep the shares and don’t wish to sell them in the future, then a demat account will suffice. However, if you plan to sell the shares, then you will also require a trading account. According to the Indian financial system, an investor can sell IPO shares only after opening a trading account which is linked to their demat account.
If the investor wishes to operate more than one demat accounts, then they have to pay multiple annual maintenance charges (AMC) for every account. Other than the AMC charges, the account holder also has to pay separate charges such as brokerage fee and demat charges. If the investor doesn’t own more than one trading account, then they need not pay any additional charges except the one incurred during the opening of the account.
There is no limitation as to how many trading accounts or demat accounts an individual can hold using one PAN card. Moreover, an investor can have one or more trading or demat account with the same or a different broker.
The Trading Process
Once you open a trading and a demat account, you have to first credit funds from your bank account to the trading account. When you purchase stocks, the equivalent amount of money will be deducted from your trading account, and when you sell the stocks, the equivalent amount of money will be credited to your trading account.
To integrate the three accounts, i.e., trading account, demat account and a bank account that majorly run your trading process, some banks have started the 3-in-1 account. This type of account is convenient for investors as they get to have one point of contact for all the three accounts. However, note that some banks may put pressure on maintaining a minimum balance in your savings account. Also, it is not a huge benefit as most brokerage platforms allow investors to trade funds from their banks to their trading account seamlessly.
While starting a trading and a demat account has been made easy with the help of technology, an investor must also approach the stock market with a substantial understanding of the markets and the securities traded therein. Moreover, once an investor recognises the differences between the two account, his trading journey will become more effective!