Before making an investment in the share market, it is important for you as an investor to know how to create a good or successful trading account. Investors new to the stock market often hear about a trading account and a demat account and may be confused about whether these two accounts are the same or have different functions. Both types of accounts must be created prior to trading on the stock market, but functionally, they are very different.
In this article, we unwrap the key differences between a trading account and a demat account, helping beginners make informed decisions before starting their investment journey.
What is a Demat Account
A demat account, short for “dematerialised account,” functions as an electronic storage system for securities. This account stores your stocks, exchange-traded funds (ETFs), bonds, and mutual funds in digital format instead of physical share certificates.
The Securities and Exchange Board of India (SEBI) regulates demat accounts in India, which are maintained by depositories such as NSDL and CDSL. Your shares are credited to your Demat account when you make a purchase. When you sell, they are debited from it. This account functions as a secure digital storage space for all your financial assets.
Importantly, it only holds securities after the completion of trading transactions.
What Is a Trading Account?
A trading account enables users to buy and sell stocks on the market. It provides access to both exchange platforms and their Demat accounts through its connection to stock exchanges.
Through a trading account, investors place orders to buy or sell shares at market prices or predefined limits. The trading account uses order execution to transfer shares to or from the Demat account, while funds are transferred to or from the associated bank account.
Thus, a trading account enables you to execute trades, while a Demat account stores your investment assets.
Key Differences Between Demat and Trading Accounts
Although both accounts are closely linked, their functions are clearly different:
- Purpose: The purpose of a demat account is to keep securities safe, while a trading account is used for buying and selling financial securities.
- Transaction Role: Trading accounts initiate transactions, while demat accounts complete settlement by holding or releasing shares.
- Regulatory Framework: A trading account functions through SEBI-registered stockbrokers, while depositories oversee the management of Demat accounts.
- Frequency of activity: Demat accounts remain inactive when investors choose to keep their assets for extended periods, whereas users employ trading accounts to conduct order operations.
Understanding these important differences between the two helps beginners avoid common misconceptions when entering the share market.
Why Do You Need Both Accounts?
To participate fully in the Indian equity market, investors need both accounts working together. A trading account cannot store shares alone, while a Demat account cannot function as a trading platform and execute trades.
For example, when you buy shares:
- The order is placed through your trading account.
- Funds are debited from your bank account.
- The shares are transferred to your demat account after the settlement period ends.
Costs and Charges to Be Aware Of
Both account types involve certain charges. Demat accounts require users to pay annual maintenance costs (AMC), while trading accounts require users to pay brokerage fees along with transaction costs, STT, and GST taxes.
Different brokers apply different charges, which makes it essential for beginners to understand the costs before they create accounts, especially if they intend to engage in frequent trading.
Conclusion
For new investors, it is important to understand the differences between a demat account and a trading account. The demat account is used to hold your securities, whereas the trading account allows you to actively buy and sell these securities on the stock/exchanges. Both accounts work together and function in a secure and regulated way.
By learning these basics early, beginners can navigate the share market with greater confidence and clarity, reducing errors and improving their overall investment experience.
FAQs
1. Can I invest in shares with only a Demat account?
No. A demat account can be used to store securities or shares electronically, but you will require a trading account to conduct transactions such as purchasing or selling shares.
2. Do I have to use the same broker for my trading account as for my demat account?
Yes. Both accounts must be linked to the same brokerage firm or financial institution in order for transactions to settle in a timely manner.
3. Can long-term investors avoid using a trading account frequently?
Yes. If you invest for the long term, you will typically not need to use your trading account very often, while your investments will continue to be stored securely in your demat account.