Choosing Between a Demat Account and a Trading Account for Your Investments

What is a Trading Account?

One of those accounts that enables investors to purchase and sell products, including ETFs, mutual funds, bonds, and stocks on the stock market, is called a trading account. It’s opened by a licensed brokerage or stockbroker company, which acts as an intermediary between the investor and the stock exchange.

How to Open a Trading Account?

Pick a Stockbroker: Select the right stockbroker or brokerage company based on numerous parameters including brokerage fees, trading platform, research and analysis tools, customer support, etc.

Fill in the account Opening Form: Fill in your private details (name, address, telephone number, PAN number, bank Account details, etc. proof of address and identity) when you’ve chosen a stockbroker for you.

Submit Required Documents: Additionally, you have to submit some documents proving your address and identity. They may be an Aadhaar card, driving license, passport, voter ID. You might be requested to bring in a canceled cheque or bank statement as proof of bank account.

Full In Person Verification: Some companies send out a representative to your house with the account opening form and Know Your Client (KYC) form.

Fund the Account: Right after establishing the account, you have to fund it to begin trading. You can transfer money from your bank account to the trading account by NEFT, RTGS, UPI, etc

Voila! You’re now prepared to trade on the stock market together with your trading account.

What is a Demat Account?

Demat account is sometimes known as a “Dematerialized account.” It’s an electronic account, linked to a bank account of any person and also serves as his digital vault for holding his securities. Consequently, the DEMAT account credits these securities at purchase and debits the same at sale.

How To Trade With Demat Account?

The investor must follow these steps to trade through a Demat account:

Open a demat account with a DP and link to the trading account.

Pick a stockbroker who provides internet trading and access to the stock exchange.

Make an order to purchase and sell securities online with the marketplace of the stockbroker.

The stockbroker will execute the trade for them, and the Demat account will credit / debit the shares appropriately.

With a Demat account and online trading platform, investors can check investments and transactions made.

The real difference between trading and demat accounts is simple:

Feature	Demat Account	Trading Account
Purpose	Holds securities in electronic form	Facilitates buying and selling of securities
Usage	Used to store and track securities	Used to place buy/sell orders on a stock exchange
Nature of Holdings	Only holds securities (like stocks, bonds, etc.)	Holds cash, stocks, derivatives, and financial instruments
Account Opening	Requires a Depository Participant (DP) to open	Requires a stockbroker to open
Transactions	Facilitates the transfer of securities to/from trading accounts	Facilitates execution of trades in the stock market
Charges	Annual Maintenance Charge (AMC), dematerialization, and rematerialization fees	Brokerage fees, transaction fees, and government levies
Security	Protects against theft or loss of securities	No direct guarantee against security loss
Trading Platform	Not used for placing trade orders	Provides platforms to execute trades online
Mandatory?	Required for equity delivery trading	Required for any buying or selling of securities

 

Choosing Between a Trading & Demat Account?

The choice of the right account for you might be a bit challenging but easy if you read the next factors. 

Goals for Investments: In case your primary objective is to purchase and sell securities, the trading account is more pertinent. In case you would like to keep securities for the very long haul, the Demat account is way better. Objectives of Demat Accounts are naturally of this nature.

Frequency of Trading: In case you trade often, you need a trading account to place orders fast. If you are a long-term investor in securities, you only need a Demat account.

Security Requirements: In case you wish to make certain your investments are secure, a Demat account has increased protection against theft, damage, or loss of tangible assets.

Cost Factors: Trading accounts charge more in transaction charges and brokerage than Demat accounts. Consequently, trading costs should be thought about while selecting the account.

Platform for Trading: In case you wish to trade online, select a broker that also provides an internet trading platform. While many trading accounts provide this facility, some Demat accounts might not.

Buying Shares.

Your trading account and demat account work together when you purchase shares on the stock market.

Your trading account is the place you make buy/sell orders for stocks. Whenever you order to purchase shares, your trading account forwards the order to the stock exchange for execution.

The shares are credited in your demat account after your buy order is executed. Your Demat account is an electronic locker for your shares. You purchase shares, and they get deducted from the seller’s demat account and then credited to your demat account.

The DP you appointed helps transfer shares from the seller’s demat account to your demat account. A DP will be the registered agent of the depository (CDSL or NSDL) and is responsible for maintaining your demat account.

Selling of shares.

Whenever you sell shares, it impacts both your trading account and your demat account. You put a sell order within the trading account, and the shares are deducted from your demat account and then deposited to the stock exchange pool account. They move from the pool account to the buyer’s demat account and are credited with the shares.

Therefore, after all the transactions, the sale proceeds reach your trading account. Note the trading account and demat account are two distinct accounts. Hence the trading account lets you trade in the market, while the demat account is for maintaining and holding shares.

Cost Charges.

There are many fees and costs for trading & demat accounts, and you should understand them prior to an account being opened. Now consider the difference between a Demat account cost charge and a Trading account cost charge.

Trading Account Fees.

Brokerage fee: The broker charges this commission on trading transactions, typically as a percentage of the trade value. For example, if the brokerage fee is 0.1% and you buy shares worth ₹10,000, the brokerage fee will be ₹10.

Transaction Fee: The stock exchange charges these charges for execution of the trade. They may be between 0.003% and 0.05% of the trade value.

STT, GST & Stamp Duty: All are state-specific governmental charges.

Demat Account Charges.

AMC: It is an annual maintenance charge that the depository charges for keeping the demat account. The charges could begin from Rs. 300 to Rs. 1,500 or more, based on the depository and account type.

Dematerialization Charges: In case you convert physical share certificates to electronic form, you pay a fee for dematerialization.

Rematerialization Charges: In order to transform electronic shares to physical, you can pay a fee for rematerialization.

Remember that precise costs and fees for trading and demat accounts may differ by broker, depositor, and account type.

Can One Open a Demat Account Without Opening a Trading Account or the reverse?

No need to open a trading & Demat account at the very same time. It is easy to have one without the other. You do not actually need a Demat account in case you wish to trade in options and futures, for example. In case you want an Initial Public Offering, or IPO, and also intend on holding back the shares, then a Demat account could suffice. However, to sell the shares, you need a brokerage account.

However, in the case of equity delivery trading, the presence of a Demat account is unavoidable. Thus, the need for a trading account, a Demat account, or even both is entirely dependent on your goals.