The key difference between a Demat and a Trading account is that a Demat account is used to hold your securities such as your share certificates and other documents in electronic format whereas a Trading account is used for buying and selling these securities in the stock market.
What Is a Demat Account?
A Demat account is short for a dematerialised account. It stores securities like stocks, bonds, mutual funds, and other financial instruments in digital format, eliminating the need for physical certificates. It facilitates streamlining the trading, investing, and transfer of ownership of securities on the stock market.
What Is a Trading Account?
A trading account is an interface that allows the buying and selling of financial securities, including stocks, commodities, and currencies, in the stock market. It acts as an interface between the investor’s bank and the Demat account.
Although a Demat account and a Trading account have two different purposes, they are closely related. In fact, your actual stock market activity is a close interplay between your Trading account, Demat account, and your bank account. The combination of Trading and Demat account is popularly known as a 2-in-1 account in the stock market terminology. Let us now look at the differences between the two.
Difference Between Demat and Trading Accounts
The table below describes the differences between Demat and Trading accounts.
|Aspects||Demat account||Trading account|
|Purpose||The demat is used for storing investment securities in electronic format; eliminating the need for physical certificates||A Trading account facilitates the buying and selling of securities|
|Function||The primary function is to hold securities in a dematerialised format||Enables placing orders on the stock exchange and executing trades in real-time|
|Transaction Settlement||Used to receive delivery of securities; handles transfers and settlements of securities during buying and selling||Enables settlement of securities after a trade is executed|
|Ownership Transfer||Enables transfer of securities without the need for physical delivery||Facilitates transfer of securities as per the terms of trade|
|Linked Account||Requires linking with the user’s banking account||Linked with the Demat account for direct conversion of securities|
Difference between nature of Demat & Trading accounts (stock vs flow)
The fundamental difference is that a Trading account captures your capital market transactions over a period of time whereas a Demat account maintains the holding of shares and other securities at a point in time. Therefore, a Trading account is in the nature of flow of transactions over a period of time whereas a Demat account actually captures your wealth effect at a single point in time.
Demat is measured at a specific point in time; Trading is measured over a period of time
This follows logically from the previous point. When you look at Trading account versus Demat account, this is the fundamental difference. Since Trading account captures transactions over a period of time, it is always measured over a period of time (1 month, 3 months, 1 year, etc.). Demat account, being a record of the ownership of securities, is always measured at a point in time (normally as on 31st of March of each financial year).
Steps to Open Demat and Trading Account
- Choosing a stock broker: For Demat and trading account opening, you must select a reputed stock broker. Research their services, brokerage fees, trading platforms, and customer support to make an informed decision.
- Filling application: You can open an account online by filling out the application form and submitting the required documents, such as identity proof, address proof, PAN card, and passport-size photographs. Following your application, some brokers may require you to undergo in-person verification, while others may conduct video KYC to complete the assessment process.
- Customer ID generation: After verification, the broker will generate your unique customer ID. This ID will be used in the future for all sorts of communication with the broker.
- Assessing trading platform: After the account is active, you‘ll receive log-in credentials from the broker for their trading platform. You can use it to place orders, track the market, monitor your portfolio, and execute trades.
- Account activation and bank account linking: Following the verification process, your account will be activated, and you can link your bank account with the Demat and trading accounts for seamless fund transfers and settlements. Deposit money into your trading account to start trading.
How Trading and Demat account interface when you buy shares?
To understand what a Trading and a Demat account is from the right perspective, let us look at what happens when you place an order to buy shares. Let us say, you place an order to buy 100 shares of X Company at Rs. 910, and the order is confirmed. Then you will have to pre-fund your trading account to the extent of Rs. 91,000 latest by 11 AM next morning. On T+2 day, the shares are automatically credited to your Demat account. If you are an online trader, this entire process is totally seamless.
How Trading and Demat accounts interface when you sell shares?
Let us assume that you sold 500 shares of Stock ‘X’ at Rs.420. The trading engine will have to first satisfy itself that you have balance of shares in your Demat account. Once you have the required balance in your Demat account, the 500 shares will be debited to your Demat account on T+1 day and the amount of Rs 2,10,000 lakhs are credited to your bank account on T+2 day. In case of offline account, you need to provide the Debit Instruction Slip (DIS) to your broker on the same day. This problem is solved if in case you have an online Demat account and you have given Power of Attorney to your broker. In that case, the entire process is seamless.
Can we sell shares on T+1 before it comes into your Demat account?
This is an interesting question. Assume that you bought shares of “X” on Monday. You will get the Demat credit only on Wednesday evening. That means you can effectively sell it only on Thursday. What if the price has moved up by 10% on Wednesday morning? Can you sell it before it comes to your Demat account? The answer is yes. The broker will allow you to sell the shares before it comes into your Demat account. However, there is a risk that you may not get the delivery on T+2 day due to a short delivery. In that case, your shares will go into an auction and will come into your Demat account only on T+3 day. That means your sale of shares could turn bad. That is the risk you run when you sell shares that have not yet come into your Demat account.
Can I have a Demat account without a Trading account?
Yes, that is perfectly possible. If you apply for an IPO, then you only need a Demat account to hold the shares on allotment. If you only intend to hold these shares and do not want to sell them, then Demat account alone will suffice. However, if you intend to sell these shares, then you will be required to open a Trading account first. You can sell these shares only after your Trading account is activated and your Demat account is linked to this Trading account.
Can I have a Trading account without a Demat account?
Demat account is only required if you want to hold shares in demat form. So, if you have opened a trading account and only intend to trade in futures and options, then a Demat account is not required. That is because futures and options in India are cash settled and do not result in delivery. However, if you intend to deal in equities the Demat account is a must. Can you avoid a demat account if you only intend to trade equities intraday? The answer is no! The moment you intend to trade in equities, SEBI regulations insist that you open a Demat account along with your Trading account.
Remember, not all your trading account transactions will result in delivery into the Demat account. For example, intraday equity trades, futures trades, options trades, and currency trades are executed in your Trading account, but they do not impact your Demat account. Similarly, you can buy IPOs, RBI bonds and Gold Bonds directly into your Demat account without any Demat-Trading Interaction.
Charges for Demat and Trading accounts
An annual maintenance charge is levied by the Depository Participant with whom you have opened your Demat account. Legally, an investor can have multiple Demat and Trading accounts using a single PAN as there is no limit on the number of accounts per PAN. Thus, you might have to pay the AMC (Annual Maintenance Charge) to all the DPs where you have opened a Demat account.
Additionally, transaction and custodian fees are also levied on the investor.
What is the primary purpose of a Demat account compared to a Trading account?
Demat is the dematerialised account that holds securities like stocks, bonds, commercial papers, etc., in electronic format. The trading account is an electronic interface that facilitates security buying and selling.
What are the 3 uses of trading accounts?
The 3 uses of trading accounts are the following:
- Buying and selling on different securities
- Trading in multiple stock exchanges
- Access to research reports and market data
Is the Demat account free?
The charges to open a Demat account depend on the stockbroker. Some brokers offer the service for free, while others may charge a nominal amount. You must do research before choosing a broker.
How does transaction settlement differ between Demat and Trading accounts?
A trading account is a platform for buying and selling securities. Conversely, a Demat account stores investment securities in electronic format and eliminates the need for physical certificates.