The basic difference between a trading account and a demat account is that a trading account is a record of flows while demat account is a record of stocks. Can an investor have a demat account with trading account? You need a demat account to hold all your investments in the form of equities, bonds, ETFs etc. Trading account is essential if you intend to buy and sell equities or futures and options. Normally, brokers will open a trading-cum-demat account. That is the best way to do it since both these accounts are very intricately related to one another. It is really hard to use one account without using the other. But there is no compulsion on you to open both the accounts simultaneously. You can opt to just open a demat account under specific circumstances. Remember that demat account and trading account are at the core of investing and you need to learn how to start trading with demat account.
Quite often investors only require a demat account because they want to convert their physical share holdings into demat holdings. This does not really require a trading account. Once your demat account is opened you need to submit a copy of Demat Requisition Form (DRF) along with copies of your physical share certificates to your DP. Then your DP will take up the issue with the registrar and transfer agent (RTA) for verifying your physical share certificates and once the registrar approves the same, the equivalent number of shares are electronically credited to your demat account. Of course, if you only want to hold these shares then demat account is good enough. The day you decide to sell these shares you will require a trading account. Direct buying into your demat account or selling from your demat account is not permitted without a trading account to transact your trades.
When you just need to receive shares via automatic transmission
While transfer is a voluntary process, transmission happens by operation of law. For example, when a person dies, his demat shares will pass on to the nominee or to the legal heir, as the case may be. Assume that your uncle who had appointed you as a nominee of his demat account passed away. That means, these shares must now logically come into your demat account. Suppose you only want to hold these shares and do not intend to sell these shares for sentimental reasons, then you can only open a demat account. You can submit the demat details to your DP along with a copy of the death certificate of your uncle and the nomination form. Based on these details, the shares in your uncle’s demat account will be automatically transmitted into your demat account. Of course, at a later date if you want to sell these shares you will still require a trading account.
When your demat account is intended to hold your non-equity assets
Your demat account can not only hold your equity assets but also other assets like ETFs, closed ended funds, open ended funds, government bonds, gold bonds etc. While index ETFs and gold ETFs have to be sold through your trading account, gold bonds and G-Secs cannot be sold through your trading account. If you only intend to hold such assets like government bonds, institutional bonds, gold bonds etc in your demat account then you do not need a trading account. In these cases, you are only looking at demat account as a more convenient method of holding your bonds compared to the physical methodology.
When you only intend to invest in an IPO and hold on to it
Lastly, for an IPO investment you require only demat account as per SEBI regulations. That is because the demat account number (DP ID + BO ID) has to be mentioned jointly in the IPO application form. Only then can you apply for an IPO. Assume that your friend has come out with an IPO and wants you to invest in it. Obviously, being a close friend’s IPO, you may not intend to sell it any time soon. In that case, you can just open a demat account and use this demat account to apply for the IPO. When the shares get allotted to you, these shares are directly credited to your demat account. Here again there is a caveat! The day you decide to sell these shares, you will first require a trading account to execute these transactions. Otherwise, your demat account is good enough!