Share trading wasn’t always as easy as it seems today. Before 1991, all trades were carried out in physical stock markets, with paper share certificates being issued to investors. However, there used to be several hassles associated with physical share certificates. First, investors had to wait in long queues for hours to receive them; secondly, if misplaced, it was nearly impossible to retrieve them.
As a result, investors had to bear high losses, and the market was riddled with failed trades. To eliminate these issues, the Indian Government set up the National Securities Depository – widely known as ‘NSDL’ today – to initiate the process of Dematerialisation of shares. By 1996, the Demat account system was introduced for trades on the National Stock Exchange (NSE).
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A Demat account stands for a Dematerialisation account. It enables you to store shares, mutual funds, and other securities in electronic form. It is like a regular savings bank account used to store your money digitally. The only difference is that a Demat accounts stores shares and other securities instead of money.
You can place buy and sell orders from your Demat account, and the shares will be transferred or received accordingly. Per the Securities and Exchange Board of India (SEBI) guidelines, a Demat account is now mandatory to trade or invest in the share markets.
A Demat account is necessary to store shares in electronic form. However, only a Demat account isn’t enough to execute a trade in the stock markets. You will also need a trading account and a bank account. But are you aware of the differences between a Demat account, a trading account, and a bank account?
As you already know about the Demat account, let’s discuss the bank and trading accounts. While a bank account transfers or receives money for buying or selling shares, a trading account acts as a link between the bank account and the Demat account.
So, when you transfer money from your bank account, it temporarily gets deposited into a trading account before being used for buying shares from the share markets. Similarly, when you sell shares, you receive money in your trading account, which can be transferred to your bank account post the trade settlement.
All reputed stockbrokers these days allow you to open a 2-in-1 Demat-cum-trading account. It means you won’t have to open separate Demat and trading accounts for share trading. You can simply open a single bundled account and enjoy both benefits. Some stockbrokers even allow you to open a 3-in-1 account, which also offers the services of a bank account apart from Demat and trading accounts.
But the question is, what if you want to unbundle your Demat and trading accounts? This can be beneficial in certain scenarios and help you save money.
The answer is “Yes”. You can open separate Demat and trading accounts with the same or different stockbrokers. For example, if you want to purchase shares for the long term without indulging in regular trading, opting for unbundled Demat and trading accounts is a good idea. Similarly, if you want to invest only in Initial Public Offerings (IPOs) and hold shares for the long term, you can consider having only a Demat account.
You can choose between a bundled 2-in-1 account or separate Demat and trading accounts. However, the decision should be based on how you intend to invest in the share market.
If you are a trader who buys and sells securities frequently, opting for a 2-in-1 or 3-in-1 Demat account is always better. Otherwise, you may lose out on potential profits as opening a new trading account and linking it with your Demat account every time before entering a trade might be arduous and time-taking.
On the other hand, if you are an investor looking to purchase and hold shares relatively long, having separate Demat and trading accounts can be a better idea. This way, you won’t have to pay for the services you don’t intend to use.