Have you ever thought of investing in the stock market? If yes, you must also be aware of the requirements to invest money in the stock exchange. One of the most important and mandatory requirements for investors is to have a trading account and a Demat account. Even a number of novice traders have a lot of confusion about Demat accounts and trading accounts. Trading and Demat accounts may confuse you as they are typically linked accounts. Furthermore, they can both be opened via a proficient brokerage. However, if you want to trade with ease, you should know the difference between a Demat account and a trading account, as different aspects of these must be grasped for efficient and cost-effective use.
While a Demat account is used to hold the securities in the dematerialized form, the trading account is an intermediary between the Demat account and the savings bank account of the investor. If one wants to trade in shares, having a Demat account and a trading account is mandatory. Possessing both these accounts has been made compulsory by SEBI, or the Securities and Exchange Board of India, the regulatory body that handles the operation of the exchanges and stock markets. By the use of these accounts (Demat and trading), investors can buy or sell shares with convenience. Investors should also note that both Demat accounts (holding securities in electronic formats) and trading accounts (to purchase and sell shares) are linked to a bank account for the seamless flow of transactions.
The shares which are sold or bought are always stored in the dematerialized accounts or the Demat account, as they are commonly known as. The term “dematerialized” has the short form of “Demat”, meaning that any securities that are bought on the exchanges are stored in electronic formats. People can no longer hold physical share certificates, hence the existence of Demat accounts. The trading account acts as the intermediary between the Demat account and the bank account. The shares that are held in the Demat account, are taken and are sold in the stock market using a trading account. A Demat account is more like a savings account or a storage facility for any securities “saved” or stored, and the trading account can be compared to the current account for the share purchases. Plainly put, a trading account serves the purpose of the transactions that investors and traders undertake in relation to their securities. Transactions entail the purchase and sale of shares. Without a Demat account, a trading account is useless, and a trading account has no meaning if you are transacting and trading in securities that require storage or holding, like stocks.
The facility of a Demat account is that it retains financial instruments like securities and shares. The Demat account also serves the function of re-materialization which is the conversion of securities from the electronic form to the physical form. This act of selling as well as buying securities is performed using a trading account.
If the trader only wishes to trade in options or futures, or currency, the same can be done using a trading account. But, if the trader wants to trade in stocks, both Demat and trading accounts are needed. Primarily for equity holdings, Demat accounts are necessary as they securely store equities. Demat accounts can be opened at a bank with a dedicated Demat department. However, a trading account may or may not be opened at the same bank, if the bank does not have a brokerage facility. Nonetheless, reputed brokerages like Motilal Oswal have the facility to open both Demat and trading accounts in one spot.
When an investor purchases a share by using the trading account, the money gets transferred from the linked bank account to buy the shares, and the shares are transferred to the Demat account for consequent storage. When the shares are sold, the shares are taken from the Demat account and are sold in the stock exchange, and the money thus obtained gets transferred to the bank account of the investor. Therefore, linking all three accounts is essential when you wish to trade on the stock market.
There is no limit legally on the number of trading accounts or Demat accounts a person can have using one PAN card. One can have more than one trading or Demat account with the same or a different broker.
If the investor wishes to have multiple Demat accounts, then they would have to pay Annual Maintenance charges for each and every account they hold, even if the accounts are not in use. Apart from the AMC charges, the account holder also needs to bear the charges for the custodian and the transaction fees. If the investor has only one trading account, there would be no additional charges other than those incurred during opening of account.
To open a demat account, one needs to have a valid proof of identity and proof of address. Various documents are accepted for proof of identity and address, and the information about the same can be obtained from the brokerage firm where you plan to open the account.
Once the process of opening a Demat account is complete, the very next question which one might have is, how to trade online using a Demat account. Well, once the Demat account is opened, the account holder receives the client id and password. Traders can then log in to the trading portal using these credentials. Traders can buy or sell shares using their demat account, and they also need to have an online trading account for the same. In most of cases, both Demat accounts and trading accounts are opened together to ease the whole process.
Once both accounts are opened, the funds from the linked bank account can be transferred to the trading account. When the stocks are bought, the amount gets debited from the trading account towards the purchase, and when the stocks are sold, an equal amount of money gets credited to the trading account.
To make things simpler, a number of banks have also started to offer 3 in one accounts to their customers where the banker would provide the benefits of a trading account, a Demat account and the bank account. So, the next time you wish to invest in stocks, take a wise step by opening a Demat account and trading account with the best brokerage firm.