Difference between Demat and Trading Account

For those who want to invest in stock markets, there are few basics that they have to be aware of, and two essential requirements for trading in any stock market are all about a Demat account and a trading account. A Demat account is ideally an account in which one can store their shares or other classes of assets in a dematerialized form. Ideally, a trading account is an account that allows one to transact.

A Demat is quite similar to one’s bank account as one can record their credit/debit balances in the same way their bank records are entered in their passbook. A Demat account can be used for holding a plethora of investments, including government securities, bonds, mutual funds, exchange-traded funds, and equity shares.

What is a Demat Account?

A Demat Account is similar to one’s bank account for their share certificates and other securities held electronically. Demat account is ideally a short-term dematerialization account and makes the process of having investments including shares, bonds, government securities, Mutual Funds, Insurance, and ETFs. If one wants to trade or invest in the stock market (NSE & BSE) or other securities, having a Demat Account is mandatory.  Above all, the Demat account number is required for electronic settlements of the trades and transactions one does.

When one opens a  Demat Account, they open one with a central depository, including National Securities Depository Ltd (NSDL) or the Central Depository Services Ltd (CSDL. These repositories appoint also known as Depository Participants (DP), who act as intermediaries between themselves and investors.

For instance, the bank is the DP where one can open a Demat Account. Stockbrokers and financial institutions too are DPs, and one can open a Demat Account with them also.

Just like a bank account holds money, a Demat Account tends to keep one’s investments in an electronic form that can be easily accessed with a laptop or a smart device and Internet. All one needs to have is a unique login ID and password to access it.

What is Trading Account?

To conduct one’s stock trading activities, one requires a trading account. When a company tends to list its shares in the stock market, one can trade the same on an electronic system through a particular version referred to as a trading account.

One can get such an account by registering with a firm or a stockbroker, and in this account, one is assigned a unique trading ID that allows one to conduct trading transactions.

Difference between a Demat Account and a Trading Account

The Demat account holds the securities and shares in a digital mode such as Mutual Fund Unit, Bonds, ETFs, etc. Whereas, Trading account provides an interface in the stock market to sell and buy shares. Despite this, the Demat account acts as a repository that can store the shares an investor buys in the digital format, and on the other side, the Trading account helps the investor to buy and sell the shares in the stock market.

However, the main areas where the Demat and trading account are different in their aspects are explained below.

1. The functionality of a Demat V/s a Trading account

One of the most common differences between Demat and trading account is the functions each performs. Ideally, a trading account is mainly used to buy and sell securities, which means getting debited from one’s Demat account and sold in the market. A Demat account allows one to keep their financial instruments in an electronic format on the flip side. This also works in a way where one can change their electronic format securities in physical form also.

2. The nature of the two accounts

A trading account functions quite similar to one’s current bank account would; it in and links up to their Demat and their bank account. It works to sell one’s shares in the market by withdrawing them from their Demat account. A Demat account is where one’s claims and securities that they buy from the market tend to be stored. It is way different from a trading account that mainly functions like one’s current bank account. A Demat account primarily works as their saving account.

3. The role of the two accounts

Both these accounts are quite different as they may be, are essential any trading in the share markets one can buy shares of any company, they can use their trading account to do so. The money is debited from one’s bank account, and the stakes are reflected in their Demat account, where they tend to be credited.

Hence when one sells their shares through their trading account, the same gets debited from their Demat account, and the same is sold in the market.

The major differences between the Trading Account and the Demat account are shown in the table given below.

Parameters Trading Account Demat Account
Definition A trading account is considered as a bridge between the Demat account and the investor’s bank. Demat account is considered to store assets in the dematerialized form.
Annual Charges It depends on the firm or generally free of cost. It has to be paid by the investor.
Transaction The transaction cannot be made in the trading account. This account is only used to store assets. The investors are allowed to place trade transactions in the Demat account.

How to open a Demat Account?

The process of opening a Demat Account is easy if follow the steps given below.

  • When one opens a Demat account to carry out online trading, they get their Demat account number along with it.
  • Traders will not trade stocks online if they don’t have a Demat account and Demat account number.
  • Once they register, they need to verify their account by the DP; after the verification, they will receive an account number representing their account.
  • Before traders start investing in stocks, they should have a basic idea about how it works and general information about it.

How to open a Trading Account?

Opening a Trading Account is quite simple, and it can be seen in the following process:

  • You can start with selecting a broker or a firm and ensuring a comparative study of the brokerage rates and the services that are likely to be included.
  • People need to contact their shortlisted broker to open their accounts.
  • They can fill in their account opening form, which most probably requires them to provide their KYC details. They also need to submit this along with their ID and address proof.
  • Undergo an application verification process besides getting the details of one’s trading account.

Difference between Demat and Trading Account – FAQs

Q1. Can I have a Demat account without a trading account?

Ans. Yes, you can open a Demat account without a trading account as in many cases an investor only wants to hold its shares over a long period without intending to sell them in the short term. Hence, they can open a Demat account to store their shares.

Q2. Can I have a trading account without a Demat account?

Ans. Yes, a Demat account is required when you want to hold the shares in Demat form only. Therefore, if you intend to trade in the future and options then you can have a trading account without a Demat account.

Q3. Do I need both – demate and trading account?

Ans. When a person intends to sell his shares through the trading account then the same from the Demat account also gets debited and only after that it will be able to be sold in the market. Consequently, it is thus mandatory to have both the Demat account as well as trading account to trade in the stocks market.

Q4. Who can apply for a Demat and trading account?

Ans. The eligibility criteria to apply for a Demat and trading account is listed below:

  • An individual must be a resident of India.
  • He/she is more than 18 years of age.
  • PAN Card is a must.
  • Individual must have all the address proofs such as Voter ID/ Aadhar Card/ Driving License/ Passport/ Utility Bills of last three months.

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About FinanceGAB

Ajeet Sharma is a financial blogger and I am blogging since 2017. Financegab is a personal blog dedicated to personal finance. The main aim of this blog to help people to make well-informed financial decisions.
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