Did you ever think of investing in stock market? If yes, you also have to 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 trading account and demat account. Even a number of novice traders have a lot of confusion about demat account and trading account.
While a demat account is used to hold the securities in the dematerialized form, the trading account is intermediary between the demat account and the savings bank account of the investor. If one wants to trade in shares, having demat account and a trading account is mandatory. By the use of these accounts, the investors can buy or sell shares with convenience.
Let us now in detail have a look at the differences between a Demat account and a Trading account.
The Nature of Demat account and trading account
The shares which are sold or bought are always stored in the dematerialized accounts or the demat account as they are common known as. 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. Demat account is more like the savings account or a storage facility and the trading account can be compared to the current account for the share purchases.
Differences in Function of Demat account and trading account
The facility of a demat account is that it retains the 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 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.
The Role of Demat and Trading Accounts in Trading Process
When an investor purchases a share by using the trading account, the money gets transferred from the linked bank account and the shares are transferred to the demat account. 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.
The Difference in the Charges of Demat account and trading account
There is no limit legally on the number of trading account or demat account a person can have using one PAN card. One can have more than one trading or demat account with 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 that those incurred during opening of account.
The Prerequisites for Account Opening
To open 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, to how to trade online using Demat account. Well, once the demat account is opened, the account holder receives the client id and password. Traders can then login 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 the cases, both demat account and trading accounts are opened together to ease the whole process.
Once both the 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, the equal amount of money gets credited to the trading account.
To make thinks simpler, a number of banks have also started to offer 3 in one account to their customers where the banker would provide the benefits of a trading account, demat account and the bank account. So, the next time you wish to invest in stocks, take a wise step by opening demat account and trading account with the best brokerage firm.