While playing distinct roles, both Demat and trading accounts are closely integrated and help in online share trading. While you can open separate Demat and trading accounts, most brokers offer the option to open Demat cum trading accounts, which is preferable since having them with the same broker saves you from the process of linking them to each other and then linking the bank additionally. There are options available to open free demat and trading accounts with low brokerage charges provided by different stockbrokers. Open your account today and get started with investing in share markets.
The difference between trading and demat account will be clear if you understand how share trading works. Share trading in India has evolved over time transitioning from open outcry system with people gesticulating on trading floors to a complete digitized trading ecosystem with investors across geographies participating in trade through mobile phones. This change has been possible because of the advent of demat and trading accounts that overhauled the traditional ways of share trading.
Share Trading before Demat and Trading Account
Digging a little bit in history reveals that prior to 1996 the shares of companies existed as paper certificates. Trading in them meant a lot of paperwork. Details of the shareholder will have to be written manually entered every time, then, it would need attestations and couriering, all adding to hassle and delays. Add to it the risks of loss of certificates, damage, forging or tampering and you will realize how much investors in past faced the risks in share trading.
The advent of Demat and Trading Account
With the Depositories Act, 1996, the journey of transitioning from a traditional system to a computerized system of share trading commenced in India. The shares began to get dematerialized and converted to digital format. The depositories were set up to store these shares in digital format, just like banks, which store cash in digital format. The stockbrokers played the role of intermediaries between the depositories and the investors by offering the option to open demat and trading accounts.
What is Demat Account?
The shares you buy in the stock exchange are held in Demat Account in digital format. Demat is short for dematerialized, which means changing from physical form to digital form. Shares stored in Demat account electronically are safe and secure. Each demat account has a unique 16-digit number. You can access your demat account on your mobile or laptop anytime through login and password. Besides the shares, demat accounts can store bonds, mutual fund units, Exchange Traded Funds (ETFs) as well. Given the safety and convenience associated with digital storage SEBI (Securities and Exchange Board of India) has made it essential to conduct stock market trades in digital shares. This means having a demat account is must to participate in stock market trading.
What is Trading Account?
While demat account is just a repository to hold the shares and securities, a Trading account helps you transact in the stock exchange. The trading account links your bank account and the demat account. You can transfer money from your bank account to the trading account and vice-versa. While trading, you can place an order to buy or sell stocks through the trading account. When trade is executed, the shared get credited in your demat account.
Demat Vs. Trading Account
Let us summarize the difference between Demat and trading accounts.