Stock markets can turn into a money mankind machine, but it is far from a gamble, but it is a systematic process that involves scientific investments done through extensive research by the experts. But for anyone to invest in the capital markets, it is essential to be familiar with the fundamentals of the stock markets. The journey to begin trading begins with opening a Demat account and a trading account. Ever Since SEBI mandated the Dematerialisation of Physical shares, we became familiar with the Demat accounts; Online Demat accounts are used to hold shares and securities such as bonds, ETFs, and Mutual Fund Units in a dematerialised format; on the other hand, a trading account provides you with the interface.
Trading account vs Demat Account
Though these terms seem no different to many. When you stack Trading Account Vs Demat account, you can find many differences, such as
- Meaning: Demat account allows the account holders to store the securities in Demat format. On the other hand, a trading account is an account through which the investors put in the buy or sell orders for the trade.
- SEBI/NSDL approval: Opening a Demat account requires mandatory approval from SEBI, NSDL, or CDSL. The same is not required to open a trading account.
- Purpose: A Demat account is only used for holding, not for transactions. A trading account is used only for transactions.
- A Demat account uses a unique Demat number to identify the account. A trading account has a unique trading number used for trading in the capital markets.
- Key Role: The Key Role of the Demat account is to ensure the security of the investor’s shares. The key role of a trading account is to allow an investor to carry out transactions in the stock markets.
- Nature: A Demat account works like a savings account; it allows the investor to store the financial securities in a dematerialised format. A trading account functions like a current account.
To trade in the stock market, you must have a trading and Demat account. The way it works is that when you buy the shares of any listed company, you require a trading account to process this transaction. The money gets debited from the trading account, and the shares of the selected company get credited to your Demat account.
Similarly, when the shares are sold, they get debited from your Demat account. The proceeds from the sale of the account get reflected in the trading account. This interconnected functioning makes it mandatory for you to have both the accounts if you want to trade in the stock markets.
Can I have a Demat account without a Trading account?
Yes, you can have an Online Demat account without a trading account. When you are applying for an IPO, you would only need a Demat account to hold the shares on the allotment. Only a Demat account will be enough if you intend to hold them and not trade or sell those allotted shares. But if you want to sell them, you need to open a trading account. You only trade or sell these shares after your Trading account is activated, and your Demat account is linked with it.
Can I have a Trading account without a Demat account?
Functionally, a Demat account is only required if you intend to hold shares in a Demat format. If you have opened a trading account and only wish to trade in the future and options, then a Demat account is not needed. This happens because the derivatives, such as futures and options in India, do end up in delivery and can be cash-settled. But if you are intending to trade in the equities in India, having a Demat account is mandatory.
The moment you think of trading in equities, SEBI’s regulations come into action, and they insist on opening a Demat account along with your trading account.
There is a small distinction to remember if you are finding it a bit confusing. Not every transaction which happens in the trading account will be delivered into your Demat account.
Transactions such as Intraday Equity trades, Future trades, Options trades, and currency trades may be executed in your Transaction account, but they do not impact the Demat account. Similarly, if you buy IPOs, RBI Bonds, or Sovereign gold Bonds, the transaction will credit the securities directly into your Demat account without needing any trading account interaction.
Charges for Demat and Trading accounts
Categorically Demat account has the following chargers.
- Opening Charges: The Opening Charges are usually nominal or zero. Most banks open a Demat for free if you open a 3-in-1 account, where you open a savings account, a Demat account, and a trading account in one.
- Custodian Fee: Since the advent of Dematerialisation, your shares can not be stolen, unlike the physical share certificates. The Depository participants and the banks charge a custodian fee or safety charges. It is typically charged annually unless stated otherwise.
- Annual Maintenance Charges: Usually, accounts up to a Balance of Rs 50,000 have no charge for the Basic Online Demat Account. Accounts with holdings of Rs50,001 and above up to Rs 2,00,000 would pay around Rs 100- Rs 750, depending upon the number of transactions done with that account. Some Depository participants may charge on a quarterly basis or may even charge a lifetime fee of around Rs2000 and more.
- Transaction Charges: Some Depository participants may charge based on the number of transactions made or just a flat fee on a monthly basis. Some Discount brokers may also charge around Rs1.5 per trade made by you.
When you open a trading account, it is generally free, and the charges are based on the number of transactions in the account.
A trading account and a Demat account work in sync together. For trading in equity, one must have both these accounts. Thus it is essential to pick a broker service that is the most suitable based on your investment needs.