How Does Demat Account Differ from Trading Account?

Trading in the stock market involves a lot of factors and you should acquire deep knowledge of these factors to trade without any inconvenience. Initially, you should spare some time to understand the fundamental principles according to which the stock market works.

After that, you will have to open demat and trading accounts to participate in share trading. A demat account is where you will hold your shares and securities in electronic form whereas the trading account will provide a platform for selling and purchasing shares easily.

Although both these accounts help you to invest and trade in shares, they are quite different from each other. Let us analyze the difference between demat and trading account based on their functionality, use, and other aspects:

Functionality

  • The primary function of a demat account is to hold the securities in electronic form. It allows you to convert the physical shares into electronic form and similarly, physical certificates of electronic shares can be obtained easily with a demat account.
  • On the other hand, without a trading account, it would be impossible to perform any transaction. This means that you will also need a trading account while buying or selling shares in the stock market.

Use

  • Whenever you buy or sell shares, they will be credited or debited from your demat account. You can also open a demat account with zero shares. Moreover, it enables you to store all the securities like mutual funds, ETFs, equities, bonds, etc. in one place.
  • A trading account serves as a bridge between your demat and bank account. While buying shares, they get transferred to your demat account and the money will be deducted from your bank account.
  • Similarly, while selling the shares, they will be transferred from the seller’s demat account and money will be credited in the bank account.

Let us learn this better with an example:

Suppose that you want to purchase shares from a specific company. Initially, you will place a ‘Buy’ order from your trading account. After that, the money will be deducted from your bank account and the request will be forwarded to the exchange. The trade will be executed, and you will receive the shares in your demat account, after T+2 days, where T is the day on which the order got executed.

Now, if you want to sell your shares then the shares will be transferred from your demat account by the broker. Once the trade is executed, the share will get credited to the demat account of the buyer and you will receive money in your trading account after T+2 days, where T is the day on which the order got executed. The transferred money can be further withdrawn to your bank account later.

To ensure smoother transfers, you will need the help of a depository partner or broker who is registered with a depository body. DPs offer depository services and demand brokerage fees in return.

Account maintenance charges and some other charges might be also levied every year. It is better to choose a broker who charges a fixed brokerage fee and provides a modern trading platform to track your investments.

Discount brokers are the ones who allow you to pick a subscription package as per the services and products you need. Modern-day brokers provide the facility of an app for easy access to trading options, yearly packages, and also help you to open an online demat and trading account at once.

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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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