What Are The Differences Between Trading & Demat Accounts?

Mutual funds

Investing your money in stocks and bonds is a smart move. But if you are new to investing, it can get confusing to know whether to open a Demat account, a trading account or both. To make an informed decision that benefits you the best, you need to know the difference between trading and Demat accounts. 

This post lists out the 6 key differences between trading and Demat account, the roles of each type of account and how to open a Demat and a trading account. Read on!

What is a Demat Account?

A Demat account is an electronic repository of your shares and transactions. Opening a Demat account helps dematerialise your shares. Simply put, a Demat account helps to convert physical shares into electronic forms. It works in the same way as any standard bank account. For example, investors can use it to withdraw or deposit money. However, instead of money here, your account is credited with shares. 

Also Read: Joint Demat Account: Meaning & Steps To Open Joint Demat Account Online

What is a Trading Account?

To conduct stock trading activity, you need to open a trading account. It will enable you to buy and sell shares in the stock market. A trading account acts as a link between your bank account and your Demat account. In addition, if you have an online trading account, accessing stock markets becomes much more secure. 

Differences between Trading and Demat Accounts 

The following are the crucial areas where both accounts differ. Refer to them to know about the difference between trading & Demat account. 

1. Functionality 

One of the major differences between the two accounts is their function. Today shares are traded digitally to avoid any physical transfer of shares and bonds. This rules out the tension of safekeeping your physical shares. 

A Demat account helps by keeping financial instruments in digital form. At the same time, a trading account helps facilitate the process by debiting the shares from the Demat account and selling them in the market. 

2. Nature of Account 

Another significant difference between trading and Demat account is their account nature. The trading account acts the same as the current account of your bank. In other words, it links your Demat account with your bank account. 

So, it is where people can access the information regarding the transaction carried out in the stock market. On the other hand, the Demat account shows the shares and securities an investor currently holds at a specific time. 

3. Role of Demat and Trading Accounts in IPOs

An investor must have a Demat account to participate in an IPO (Initial Public Offering). That said, those who do not wish to sell their shares can choose not to open a trading account. If someone owns a trading account but does not want to open a Demat account, he/she can trade in futures and options in derivative markets. This market does not require a supply of shares. 

4. Approval of SEBI

Approval of SEBI (Securities and Exchange Board of India) is mandatory for opening a Demat account. However, there is no such requirement for opening a trading account. 

5. Annual Maintenance Charge

One more difference between a trading and Demat account is the annual maintenance charge. These are charges levied annually to maintain the Demat account in addition to brokerage charges. So, every holder must make sure they make the annual payment without any fail. However, for trading accounts, there are no such charges. 

6. Identification number of the two accounts

There’s a unique identification number allotted to all Demat account holders. It is used to identify different accounts uniquely. In contrast, trading account holders get a unique trading number that they can use to trade shares in the stock market. 

These are the 6 key differences between a trading account and a Demat account. Depending on your financial goal, you may open a Demat account or a trading account or both. Scroll down to learn how to open a trading and Demat account. 

How to Open a Trading Account?

There are also differences between trading and Demat account in relation to the account opening procedure. So here are some simple steps to follow if you want to open a trading account:

• Step 1: Select a broker or a firm. 

• Step 2: Make an in-depth comparison of brokerage rates and services offered by different institutions.

• Step 3: Now, reach out to your shortlisted broker for carrying out the opening process.

• Step 4: Fill in the application form and your KYC details as required. Then submit the form along with supporting documents to complete the verification process. 

• Step 5: After verifying, you will be given your trading account details. 

How to Open a Demat Account?

The steps that one needs to follow for opening a Demat account are as follows:

• Step 1: Contact your Depository Participant or DP. You can find the list of DPs on the official website of National Securities Depository Ltd. or Central Depository Services Ltd. 

• Step 2: Fill out the application form and submit it with the necessary documents.

• Step 3: Complete the signing process to get all the rights and authorities associated with the contract. 

• Step 4: After you complete the process, the officials will provide you with a Beneficiary Owner Identification Number. 

Also Read: 9 Best Monthly Income Plans To Invest In 2022

Final Word

The main difference between a trading and a Demat account is that a Demat account is required to hold shares in an electronic form and a trading account is required to buy or sell shares in the stock market. Before opening a Demat or trading account, you must be aware of your own financial goals. If you are new to investing, it is best to start with a Demat account. As you become more comfortable with investing, you can start trading. 

FAQs on Trading vs Demat Accounts

1. What documents are required to open a trading and Demat account?

The following are the documents that must be with you while opening a trading and Demat account:

• Income proof
• Identity proof
• Bank proof
• Address proof
• One passport size photograph
• Signature on white paper ( it should match with your Pan card signature)

2. How does a Demat account work?

The workings of a Demat account are simple. First, it gets linked with your trading account and through it also with your bank account. Next, you need to add funds and place an order to buy shares using your trading account. 

3. Why does one need to open a Demat account?

To hold securities like mutual fund units, bonds, shares, etc., electronically, investors need to open a Demat account. Also, it may be compulsory for people to go through the opening process while participating in an initial public offering or IPO. This is because the shares get credited to the Demat account only. 

4.      Who can apply for a trading and Demat account?

Anyone can apply for a trading and Demat account regardless of age and residential status. However, if you are a minor, after attaining the age of 18, the institution will ask you to provide KYC or know Your Customer form to create a new account. 

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.