Demat vs trading account: A demat account and a trading account are two extremely important components for trading in the Indian stock market. While these terms may seem similar at first glance, each carries distinct characteristics and objectives.
When navigating the stock market, it’s crucial to recognise the subtle yet significant differences between trading and investment.
Engaging in the stock market involves two distinct activities: trading and investing. Trading entails frequent buying and selling of shares to capitalise on stock price fluctuations, while investing involves purchasing company shares to become a shareholder, participating in the company’s growth, and potentially earning capital gains through stock appreciation and dividends if the company is dividend-paying.
To undertake these activities, you require both a trading account and a demat account, which can be opened with a depository participant. In this article, let’s explore the key differences between these two accounts, as well as the brokerage fees, advantages, and disadvantages associated with each.
What is a demat account?
A demat account serves as a secure repository akin to a bank savings account where various securities such as shares, debentures, bonds, government securities, and mutual fund units are stored in electronic form.
These securities are held electronically by the depository at the request of investors through registered depository participants. Additionally, the depository provides services related to transactions in securities.
Currently, two depositories registered with SEBI are operational: the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL).
Previously, shares existed in physical form as share certificates. As the stock market transitioned to digital mode, market regulator SEBI implemented measures to convert all physical shares into electronic form, a process known as dematerialisation.
What is a trading account?
A trading account functions akin to a current account in a bank, primarily used for buying and selling securities (stocks, derivatives, and commodities) within short time frames, typically aiming for capital gains.
This account is suited for traders with short-term investment horizons, aiming to capitalise on market volatility and price movements. A trading account can be opened with a depositary participant, and you will be assigned a unique trading ID, which can be used for buying and selling shares.
Also Read: Demat account offers more than just facilitating buying, selling of shares. Here are 5 main benefits
Difference between trading and demat accounts
The key distinction between these accounts lies in their storage functions. A demat account enables you to store your shares electronically, while a trading account is specifically designed for facilitating transactions.
Both accounts are essential for participating in the stock market. For instance, when you purchase shares of a company, they are held in your demat account. However, this account alone doesn’t enable you to execute transactions with those shares on the stock exchanges. For that purpose, you need a trading account.
If you have both accounts, the process would be as follows: When you purchase shares of X company, they will be directly deposited into your demat account. Later, if you sell these shares after a few months, they will be debited from your demat account and sold in the market through your trading account, and the money will be credited to your registered bank account.
All three accounts (demat, trading, and bank) are interlinked and work together to enable you to trade in stocks.
FAQs
Can I open just a trading account without a demat account?
Yes, it’s possible. You can open a trading account exclusively if you focus solely on trading futures and options. However, please note that this account won’t allow you to trade in stocks.
Who would benefit the most from having only a trading account?
Technical traders and derivative traders typically benefit the most from having only a trading account, especially if they trade less in the equity segment.
What factors should you consider when deciding whether to open a trading account, a demat account, or both?
When deciding whether to open a trading account, a demat account, or both, you should consider factors such as your investment objectives, trading frequency, ease of access to markets, brokerage charges, and the types of securities you intend to trade.
Are the charges for the demat account and trading account the same?
No, charges for a demat account and a trading account are typically not the same. Each account typically incurs different types of fees and charges, including annual maintenance charges, transaction charges, and other miscellaneous fees, which can vary based on the depositary participants.
Do I have to pay brokerage fees for holding stocks in my demat account?
No. The broker will not charge for holding stocks in your demat account. However, when you sell these stocks, transaction charges will apply. These fees may be charged as a percentage of the total sale value or as a flat fee.