Understanding what a Demat account actually is will help you to know whether you require it for trading in stocks. Demat accounts came into existence for the main purpose of holding shares/stocks and other assets in electronic form. Earlier on, many years ago, individuals held stocks in certificates or paper form. This proved cumbersome as paper wore out, and physical certificates were prone to other drawbacks like theft, loss, forgery, and other disadvantages. The solution came with the creation of the Demat account. Nowadays, Demat accounts facilitate not only the storage of assets, but also the seamless transaction of buying and selling stocks (which you hold in the account).
If you want to undertake stock trading or use trading apps online, buying and selling shares/stocks online, it is necessary that you have a Demat account. Managed and operated by CDSL and NSDL, the two national depository entities in India, Demat accounts hold your stocks and shares like bank accounts provide storage facilities for your money. If you wish to partake in trading in stocks and shares, or hold these from a delivery basis standpoint, you must have a demat account when you trade stocks online. Consider a situation wherein you are a trader or an investor who wishes to buy a stock, say ‘X’ and hold on to it, speculating that its price will climb within a year. Where would you hold it? In a Demat account. You are still trading, because you are buying stocks with a view to selling them for gains in the future. Hence, you are trading, whether for the long term or short haul. Now, say you buy a stock with the intention of holding on to it, but it’s price climbs a month after you have bought it. You may want to sell this for profits.
When you open a Demat account online, perhaps with a prominent brokerage like Motilal Oswal, it will likely be linked to a trading account. Now, whether you wish to trade and invest in stocks, commodities, mutual funds, IPOs, etc, your Demat account eases the whole operation of investing through trading. Trading may be linked to investment, and most often, you cannot segregate the two. Nonetheless, you don’t require a Demat account if you only wish to trade in futures and options. For this, merely a trading account is necessary as futures and options settlements are conducted on a cash basis, and no asset needs to be ‘stored’ as such.
The decision of opening a Demat account (ideally linked with a trading account) depends primarily on what you are attempting to trade in online. Typically, individuals open Demat accounts with a brokerage linked to a bank account, or a bank in which they hold a bank account. Banks provide you the facility to open a Demat account if your aim is to purchase and sell stocks online. A Demat account, thus, automatically holds stocks and shares bought and this online transaction requires a Demat account.
It is possible to open a Demat account for free at Motilal Oswal. You can do this in a hassle-free way online. Banks represent brokers as they open your Demat account. However, leading brokerages like Motilal Oswal give you linked trading accounts that some banks may not provide, plus a host of value-added services to make your investment and stock trading unforgettable.
Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account