Demat Account & Trading Account

What is a Demat Account?

A dematerialised (demat for short) account allows you to hold your financial instruments in an electronic form. It provides an easy and convenient way to hold financial securities in electronic form which is safer than physical shares which are exposed to various risks such as bad delivery, delays, thefts, forgery etc. You can hold certificates of all your financial instruments such as mutual funds , Exchange Traded Funds (ETFs), shares and bonds online. To invest in the stock market, as an investor, you need a demat account.

 

With the Demat account, there is a significant reduction in cost due to lower printing and distribution and registration of shares which improved the efficiency of registrars and transfer agents. The Demat account has increased the liquidity of shares and ensures faster communication to investors with faster payment in the selling of shares.

 

What is a trading account?

A trading account is a unique account that allows you to conduct trading transactions in the stock market. It acts as a link between your demat account and your bank account. However, the Demat account is the one that holds your securities. So, whenever you want to buy or sell shares in the stock market, the transaction will take place through your trading account.

 

For instance, if you are to buy a share, the money from your bank account will be transferred to your trading account so that you purchase. Once done, the share will be credited to your Demat account. But, if you are to sell a share, the share will be debited from your Demat account and the money will be credited in your bank account.

 

Difference between demat and trading account

 

 

Both demat and trading accounts are necessary to trade in stocks. However, they are quite different. Here is an example to help you identify the difference.

Imagine you want to buy a carton of milk from a dairy store.
You pick the carton of milk and go to the billing counter. Here, you remove a specific sum of money from your wallet to pay the cashier.

In this example, the money stored in your wallet is similar to stocks stored in your demat account. Removing money from your wallet to pay the cashier is like trading. For this transaction to occur, you need to have a trading account.

As an investor, you need a demat account to deposit and hold your stocks when you purchase them. Think of your demat account as a savings bank account for your shares. You can deposit and remove stocks from your demat account whenever you like; just as you deposit and withdraw money from your bank account as per your convenience.

In comparison, you need a trading account to place ‘buy’ and ‘sell’ orders in the market. It is a requisite to conduct any transactions in the stock market. You can register with any online stockbroking firm to create an online trading account. When you register, you are provided with a unique ID that allows you to trade in the market.