When discussing the stock market, you may have often come across the terms ‘trading account’ and ‘Demat account’. You may have also heard that it is necessary to open a Demat account to trade in stocks.
Well, if you are new to the world of investing and want to start trading, read through this article to understand the meaning of a Demat and a trading account, their differences, functionality, etc.
What is a Demat Account?
Demat or dematerialisation account is an account that holds your shares, securities, bonds, mutual funds, etc., in a digital format. Thus, it eliminates the need for having a physical copy of your securities. The account keeps all your holdings stored under a single account. When you open a Demat account, you also get your account number, just like your bank account has one.
You can avail of the services of a discount broker, as they offer Demat accounts and other trading services at cost-effective rates, which are highly suitable for beginners.
What is a Trading Account?
A trading account enables you to trade (buy and sell) shares, stocks and securities on the stock market. You can use it to make transactions for buying and selling shares. It acts like an intermediary between your bank account and the Demat account. While a Demat account stores your securities, a trading account allows you to make transactions for buying and selling them.
Discount brokers also provide you with trading accounts at nominal charges, enabling you to begin your trading journey smoothly.
Demat and Trading Account: Differences Explained
| Parameter | Demat Account | Trading Account |
| Meaning | It is an account that stores shares, securities, stocks, etc., in a digital format | It is an account that enables investors to buy and sell their securities and stocks on the stock exchange. |
| Issuing Authority | A depository provides it through a Depository Participant | A SEBI-registered broker provides it. |
| Charges | When you open a Demat account, you must pay charges, such as account maintenance, transaction fees, etc. | There are no direct charges, but brokerage charges may be levied. |
| Account Linking | Must be linked to the user’s bank account. | It must be linked to the user’s Demat account. |
| Benefit | It allows you to earn the benefits that a company distributes to the shareholders, such as dividends, interest, returns, etc. | It gives you access to all the stock exchanges in the country, so that you can transact shares and securities. |
Functionality of Demat and Trading Account
Trading has two requirements: open a Demat account and have a trading account. Without both of these, you cannot buy and sell shares in the stock market. For example, you want to buy 100 shares of a company. You reach out to the depository participant and ask to place an order on your reading account. When the stock exchange receives the request to buy shares, it credits the shares to your Demat account when there is a seller at the same price.
After a few days, when you wish to sell the shares, the trading account plays its role by allowing you to sell the shares and get the returns into your account. It is also crucial to note that a Demat account is mandatory if you want to apply for an IPO. Once the shares are reflected in your Demat account, you can trade them through the trading account.
Summing Up
To start trading in shares and securities, you must open a Demat account and also have a trading account. While a Demat account acts as a storage space for your traded shares and securities, the trading account lets you buy and sell your shares and securities.
With both these accounts, you can build a lucrative portfolio and earn good returns from the stock market.
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