Your Guide to Difference between Demat and Trading Account

 

Your Guide to Difference between Demat and Trading Account

We have often noticed people getting confused between a Demat Account and a Trading Account and use both the terms interchangeably. Though they appear to be the same, there is a huge difference between a Demat Account and a Trading Account especially on the basis of the purpose served by each of them.

For people who are interested in starting stock market investments, it is essential to understand the difference between the Demat Account and Trading Account. It is essential to be aware of the basic terms related to the stock markets before the investors and traders pool in their money into it.

Let us understand what Demat and a Trading account is and how the two accounts are different from each other.

What is a Demat Account?

Demat Account or Dematerialization Account is an account that allows the investors to hold their shares in an electronic format. A Demat account converts the physical shares of investors into electronic format which is known as the dematerialization of account. When an investor opens a Demat account he/she receives a Demat account number which allows the investor to settle the trade electronically. A Demat account is just like a person’s bank account. It gets credited when the account holder buys new shares and is debited on the sale of shares.

In order to have a Demat account; it is not necessary for a person to have shares held by them. You can open a Demat account and have a zero balance in it.

What is a Trading Account?

A trading account is an account that is required by the investors and traders to carry out their trade activities. When a company issues shares in the stock market then these shares can be traded electronically for which the investors need a special account called the trading account. You can open a trading account with the help of your stockbroker. Every trading account comes with a unique trading id which gives access to trading transactions.

Differences between Demat and Trading Account

On the basis of function: The major difference between a Demat account and a trading account is on the basis of the functions performed by these two accounts. A Demat account is used for holding the securities in a dematerialized format or in an electronic format.

On the other hand, a trading account is primarily used for buying and selling of securities. This means that when you buy security your Demat account is credited and when you sell a security, the Demat account is debited.

Nature of Accounts: A Demat Account is similar to a bank account that is credited and debited when the account holder buys and sells the securities. It works like a savings bank account. On the other hand, a trading account is just like a current account. A trading account acts as a linking account between the Demat account and the bank account of the investor. It is used for carrying out buying and selling of securities.

Role of the Accounts: Both, the Demat Account and the trading account are essential for carrying out stock trading transactions. When an investor buys shares of any company, the amount equivalent to the value of shares the investor is buying is debited from his/her bank account and the shares are reflected in the account holders’ Demat account.

Likewise, when an investor sells the shares previously held by him/her the amount of money is credited to the investors’ bank account, and the number of shares is debited from the Demat account. Thus, in order to carry out stock market trading transactions, it is essential for an investor to have both a Demat and a trading account.

It is possible for an investor to have a Demat account alone provided the only purpose of the investor is to hold the shares in an electronic format. For instance, if a person wants to apply for an IPO then having a Demat account is enough as it is required to hold the shares allotted to the investor. However, if the investor wishes to trade these shares then he/she will be required to have a trading account in place.

On the other hand, if the investors wish to trade only in futures and options then they are required to have a trading account. In this case, it is possible for the trader to carry on trade without having a Demat account using the trading account. However, if the investor aims to deal in equities that having a Demat account in place is a must.