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Demat Account vs Trading Account: Know the Difference

23 Apr 2021 0 COMMENT

If you are thinking of trading in the stock market, you may have heard of two accounts. You need a Demat account and a trading account for stock market investing. However, while you need both these accounts, their functionality is different. Understanding the differences between them can help you start your investment journey in the stock market. 

What is a Demat account?

A Demat account, also called as Dematerialized account, holds your shares. A Demat account converts your shares from a physical to an electronic format. That is the account where all your purchases are stored, like shares, bonds, futures and options, exchange-traded funds, mutual funds, and other securities. All Demat accounts have a unique account number, just like bank accounts. You can open a Demat account with a zero or no balance. Your account can also be empty with no minimum number of shares in it. 

What is a trading account?

A trading account lets you trade shares of different companies on the stock market. You can use your trading account to buy and sell shares and carry out transactions. Trading accounts work alongside Demat accounts. That implies that the shares you buy on a trading account are stored on your Demat account. You can use your trading account when you wish to sell them. Like a Demat account, a trading account also has a unique number. 

Difference between Demat account and trading account

Demat Account

Trading Account

You use it to store the purchased stocks and securities.

You use it to purchase and sell stocks and securities.

You can open it without buying any shares or securities, and it's not necessary to maintain balance in it at any point in time.

It is required to transfer the funds to and from the bank account linked with it to buy and sell various securities.

Your Demat account also protects you from those unpredictable debits and credits by providing you with the option of freezing it for the desired time length.

 

The Trading account keeps you aware of the markets' ups and downs as the experts' opinions get posted regularly. It even allows you to access it, no matter if the market is open or closed.

 When you possess a Demat account, you can convert the electronic form of stocks and securities into physical ones in very little time and vice versa.

Having a Trading account means having the ease and flexibility to trade through various stock exchanges and transfer the funds and equities hassle-free.  You can trade with the comfort of sitting at home or travelling because you can access the Trading account through various devices like phone, tablet, laptop or pc.

 It gives you the power to automatically get the benefits when a company or a firm distributes dividends, returns or interests, just by owning a Demat account.

On the other hand, a Trading account gives you access to all the stock exchanges throughout the country.

Demat vs trading account: Know the functionality

Demat and trading accounts have different functions in stock market investing. A Demat account is only used for storing the shares that you buy. It merely converts the physical shares into an electronic format. However, you cannot use it to carry out a trade or a transaction. However, a trading account allows you to buy and sell securities. This account lets you trade securities before they reach your Demat account, where they are kept until you sell them. 

You can compare these two accounts to your bank account. The Demat account is similar to a savings account. Just like you keep your money in your bank’s savings account, your shares are held in your Demat account. This account offers a safe place to store all your investments. On the other hand, the trading account acts as a current account. It is used to carry out the transaction. It withdraws your shares from your Demat account and can be used to sell them later. For example, to buy 1000 shares of ABC, you will use your trading account to make the purchase. Once the transaction has been completed, the shares will be credited to your Demat account. These shares will remain here until they are sold. If you decide you sell 25 shares of ABC in the future, you will use your trading account for sale. Your Demat account will be debited with 25 shares, but it will hold the remaining 975 shares until redemption. 

Can we open a trading account without a Demat account?

No, you need a Demat account to open a trading account. Both these accounts are vital to trade in the stock market. That is because shares are available only in an electronic format. So, whenever you make a trade, the shares will require a Demat account as a storage place. To understand this better, you can consider this example: 

If the trading account is your wallet that helps you make transactions, the Demat account is the warehouse that lets you store the things you buy.

Functionality of Demat and Trading Account

Both Demat and Trading Accounts can be opened and operated online. Typically, it is advisable to open both accounts with the same DP as it facilitates seamless trading. Online access to Demat and Trading Accounts has made trading simpler in more than one way. It has eliminated the need to visit the stockbroker in person. Whether it is receiving the delivery of shares or making a trade it can all be done online.

 

Role of Demat and Trading Account

Primarily there are two requirements for trading – an interface to buy and sell shares from the market and a storage space to hold them. The Demat Account serves the purpose of holding all your shares securely in an electronic format. A Trading Account provides an interface to trade freely in the financial market.

The two accounts work closely. Here’s an example to understand the role of the two accounts. Let’s you want to buy 50 shares of ‘A’ company. Reach out to your DP to place the order of 50 shares on your Trading Account. The DP will then forward the order request to the stock exchange and there will be a seller at the same price. It is then sent to the clearing house to debit shares from the seller’s Demat Account and credit to yours.

Once the shares are successfully credited to your Demat Account you will be notified. Now after a couple of days or weeks or whenever a suitable trading opportunity arises, you may wish to sell your shares. Here’s where the Trading Account has a part to play. It allows you to trade your shares and reap returns.

The Demat Account is a mandatory requirement to apply for an IPO and get shares allocated. Like other shares, once you are allocated the IPO shares you can trade them easily through your Trading Account.

Can we open a Demat account without a trading account?

No, you need a trading account to open a Demat account. A Demat account will only hold your securities. It cannot be used to buy and sell shares. Without a trading account, the use of a Demat account may be negated. You first need a trading account to buy and sell shares and then a Demat account to store them until redemption. 

Additional Read: How to Open Demat and Trading Account?

Fun Fact:

Did you know that you can get various loans against the securities you possess in your Demat account? Well, now you know!

Conclusion

If you wish to invest in the stock market, you require both of these accounts. Therefore, make sure that you understand the differences between the two well. That will simplify the process to make seamless investments to grow your money. 

FAQs:

   1. Is the trading account and Demat account the same?

No, the trading and Demat accounts are two different accounts with unique functionalities. However, you need them both even investing in the stock market. The former lets you buy and sell shares, while the latter enables you to store them in an electronic format. 

   2 .Can I open a trading account without a Demat account?

No, you cannot open a trading account without a Demat account. Both these accounts are vital to trade in the stock market. The shares you buy through a trading account require an account like the Demat that can store them in an electronic format. For this reason, the two accounts always work in unison. 

   3. Which is the best Demat account and trading account?

ICICI Direct can offer you a great Demat and trading account. This three-in-one account can provide you with the benefits of a Demat account, a trading account, and a bank account. Moreover, you can use it to trade in shares, futures and options, IPOs (Initial Public Offerings), currencies, as well as invest in mutual funds and life insurance. This can be an excellent Demat and trading account with minimal charges. 

   4. What is the difference between a trading and a Demat account?

A Demat account is a Dematerialized account used to store the shares you purchase. This account converts the shares to an electronic format from a physical one. A trading account is where all the transactions occur. That account facilitates the buying and selling of shares and other securities, later stored on a Demat account. 

Disclaimer-

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product.