Difference Between Demat And Trading Account

As an investor, you might use the terms Demat accounts and trading accounts interchangeably. While this is not an uncommon notion, as both are closely related to each other, they have differences. One primary difference between Demat and a trading account is that when you trade in the secondary market, your trading account is used. While you buy or sell securities, they are stored in your Demat account. In this blog, let us explore the differences in detail.

What is a Demat Account?

Before delving into the debate between a Demat vs trading account, understanding about Demat account is crucial. Often referred to as a Dematerialisation account, a Demat account holds your investment instruments such as mutual funds, bonds, shares, etc., electronically.

Similar to a simple bank account, investors open a Demat account with central depositories such as National Securities Depository Limited (NSDL) or Central Depository Services Ltd. (CDSL).

A Depository Participant or DP holds your financial securities in Demat format. Demat accounts have robust security features to prevent fraud, forgery, etc.

What is a Trading Account?

A trading account is crucial for trading in the share market and buying or selling securities. Upon opening a Demat account and trading in the share market, you need this account to initiate trading when company shares are listed on the stock market.

A trading account is a bridge between your Demat and bank account, allowing you to trade. When you open a trading account, you get your unique trading number to buy or sell your preferred stocks in the market.

Demat Account Vs Trading Account

When investing, having a clear idea about the functionalities of these two makes you an informed investor. In the following table, take a look at the key difference between Demat and trading account:

Understanding the Process Flow of Trading and Demat Accounts

As an investor, getting an idea about the process flow of these accounts is important after understanding the difference between a trading account vs Demat account. Here is a brief for the working flow of the two accounts:

1. Trading Account: Your trading account acts as a cash reserve for trading in the stock market. Before buying a share, you must transfer the money from your bank to your trading account. Your trading account is credited when you purchase a share and debited when you sell it.
2. Demat Account: The process flow or working mechanism of a Demat account is quite similar to your bank. A Demat account keeps your securities safe in digital format and tracks your investments.

How to Open a Demat Account?

As an investor, you must hold a Demat account to trade in securities in India. With PL Capital Group – Prabhudas Lilladher, you can open your Demat account within simple steps:

• Step 1: Open the app store on your device, look for the PL Capital app and download it. You can also click here to open your Demat account from the website.
• Step 2: Type in your basic details, like your name and the mobile number you want to register.
• Step 3: You will receive an OTP on your mobile number. Provide the OTP, and follow the on-screen instructions to complete the KYC process to open an account.

How to Open a Trading Account?

Now, as it is clear that you need a trading account to invest in the stock market, follow the instructions below to open one:

• Step 1: Contact a broker registered with the SEBI and the stock market and apply for a trading account.
• Step 2: Fill out an account opening form with your KYC details. A broker might ask for any address proof, ID proof or additional documents.
• Step 3: Submit your duly filled application and wait for the verification process to complete.
• Step 4: After successful verification, the broker will provide your trading account details, including the trading number, to start your investment journey.

Understanding Demat vs Trading Account Charges

You should take note of the applicable charges for both of these accounts to manage your investment expenses, aside from learning the difference between Demat and trading account. Here is a detailed view of their charges:

1. Account Opening Charges: Applicable charges for opening a Demat and trading account might vary between brokers. If you open both a trading and a Demat account together, brokers usually open them for free. Investment platforms like PL do not charge anything to open a Demat account.
2. AMC: The AMC might vary depending on DPs like NSDL or CDSL, and you may need to pay a nominal charge annually to maintain your trading accounts.
3. Brokerage Fees: While transacting in securities, brokerage firms charge a certain amount as applicable fees. It is important to inquire about such charges before investing.
4. Other Fees: Other fees include Demat/Remat charges, custodian fees, Off-Market Transfers, etc.

Can You Open a Demat Account Without Having a Trading Account or Vice Versa?

The obligation of having one of these accounts without the other depends on your investment choices. Take a look at which one you need and when below:

1. While there is no particular obligation to have both accounts before investing, you can get a Demat account without a trading account and vice versa. However, most brokers open both accounts for your convenience.
2. When you apply for an Initial Public Offering (IPO), a Demat account is required to store your shares. However, to sell them, you need a trading account.
3. Note that having a Demat account becomes compulsory when trading in equities.

Conclusion

Understanding the difference between Demat and trading account is essential for informed decision-making during investments. Both accounts might be in close relation, but differ in their functions. A Demat account secures your investment instruments from fraudulent attempts, whereas a trading account allows you to buy or sell your securities in the stock market. However, by working in tandem, both of these make your investment journey smooth and easy.

FAQ’s

1. Do I need both – a Demat and a trading account?

There is no strict mandate to open both the Demat and trading accounts together. However, the requirements of these two accounts vary depending on your investment choices. For example, while trading in equity, you need both of them. For “future and options”, you need only your trading account.

2. Are trading accounts and Demat accounts the same?

Although used interchangeably by investors, the account types are not the same and differ in function. A trading account allows you to execute a purchase or sell order in the stock market. On the other hand, a Demat account keeps track of the securities you buy or sell.

3. Can I trade without a Demat account?

No, you mandatorily need a Demat account for trading purposes in India. However, you can invest in mutual funds via AMCs without a Demat account, but it has some drawbacks. Additional account opening fees, lack of fund variety, etc., are key disadvantages of this process.

4. Is it mandatory to add a nominee while opening a Demat or trading account?

Yes, it is mandatory to add a nominee while opening a Demat or trading account. The Securities and Exchange Board of India (SEBI) makes it a mandatory obligation for investors to add a trusted individual as a nominee. It ensures a seamless process for transferring your wealth from investment to your kin or the next generation.

5. Is it possible to open a joint Demat account or trading account?

Yes, opening a joint Demat account is possible. You can easily apply for a joint Demat account online as it offers more flexibility. However, you cannot open a joint trading account to purchase and sell securities in the market, as each trading account is linked with an individual PAN.