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What’s the Difference Between Demat and Trading Account?

Nowadays, there are various investment options. Some people traditionally invest in gold, while others invest in real estate and other assets. 

Most people invest in stocks as it has higher potential returns than other options, considering the risk. 

In earlier years buying and selling shares involved a lot of paperwork, which was very hectic. Thus, in 1991, the Government of India decided to undertake the dematerialization of all share transactions. 

For this, you must have two accounts; Demat and Trading account. 

This article will explain the Demat account and Trading account concepts, functions, and the difference between these accounts. 

In simple words, a Demat and trading account works as a platform through which an investor can keep their shares or buy-sell them, respectively.

What is a Demat Account?

A demat account is a platform where investors can electronically keep their shares and securities.

A demat account holds an individual’s investments like Shares, Bonds, Government Securities, Mutual Funds, Insurance, and ETFs in digital format.

This system makes it easy to keep track of or maintain your investments without paperwork.

Let’s consider you are an investor and you have bought the share of X company. Now, the certificate of share that you have bought is saved digitally on the demat account.

In short, the demat account holds ownership of your stocks and investment. There is no paperwork involved. 

Depositories like National Securities Depository Limited (NSDL) and Central Depository Service Limited (CDSL) provide free demat accounts.

Several Depository Participants are present between investors and depositories. 

What is a Trading Account?

Buying and selling of shares are done from trading accounts.

A trading account holds all investments, securities, cash, and other holdings of an investor.

It is mainly referred to as the day traders account. 

Investors must have trading accounts to sell or buy the shares of any company. 

If you are going to buy a particular share of any company, you first have to add an equal amount to your trading account. This amount will be debited from your bank account.

All the transactions in the stock market are done from trading accounts.

Unique trading account ID is provided to each trading account to perform the online transactions. 

You can have many trading accounts as you want.

Difference Between Demat Account and Trading Account

In earlier years, if you wanted to buy any company’s shares, you had to be physically present or purchase it from the broker. Every time you buy shares, you get a share ownership certificate. This was obsessively a ton of paperwork and used to be a chaotic process. 

To make this process accessible and more manageable, the Indian government introduced the Demat Account system in 1996 for trades on the National Stock Exchange of India Limited (NSE).

Whereas stockbrokers used to be responsible for sharing orders on the client’s behalf. This process lacked transparency, cost huge brokerage, and led to fraud.

Today, anyone from across the globe can open a trading account and sell or buy stocks independently. In the past few years, trading accounts in India have increased significantly. 

Online Trading accounts made the process of selling or buying shares much easier and more accessible to everyone.

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Why do you need a Demat account?

  • Demat is a dematerialization account. It converts your physical shares into a digital copy.
  • It is safe, faster and easy, and most importantly, affordable. 
  • You cannot sell or buy shares without a Demat account.
  • You are unable to invest in equity directly. 
  • SEBI governs Demat accounts. 
  • It allows users to buy or sell bonds, mutual funds, government securities, or exchange-traded funds, along with selling and buying stocks.
  • It is an electronic system, so there is no risk of stealing, damaging, or no longer existing documents.  
  • You can access it from a mobile Pc, desktop, etc.

Why do you need a Trading account?

  • It is mandatory to have a trading account linked with your bank account to trade in the stock market. 
  • You can set your trading limits and earn a profit.
  • You can analyze trade opportunities and decide strategy. 
  • You can measure your profitable position. 
  • It helps you measure the difference between the cost of shares you bought and sold.  

The role of Demat and Trading accounts. 

Demat account is a digital storage system that shows you all your current holdings.

You can perform and view all stock transactions through a trading account. 

How do Demat Account and Trading accounts function?

If you want to trade in the stock market, you need both accounts.

Let’s consider you as an investor. You are going to buy X amount of shares of any company. 

First, you have to add X amount to your Trading account wallet. This amount will be debited from your bank account.

Now, you have bought X amount of shares of any company through your trading account.

These bought shares will be credited to your Demat account.

Likewise, when you sell your shares through a trading account, the shares will get debited from your Demat account and are sold into the market. 

Limitations of Demat account and Trading account

Demat account just holds your shares. You cannot sell or buy shares through this account.

While a trading account is mainly for day traders. You cannot hold your shares in this account. 

Until now, you must have understood the difference between the Demat and Trading accounts.

Let’s know how to open these accounts.

How to open a Demat account?

When starting the demat account opening, you must first choose your depository participants. 

Every Depository participant is registered with either National Security Depository Limited (NSDL) or Central Securities Depository Limited (CDSL).

Documents required to open Demat Account:

  • Identity proof ( Aadhar card/ Passport/ ration card/Rent agreement/ Electricity bill)
  • Income proof ( Income Tax return/ Salary slip/ PAN card)
  • Photograph 

Steps involved in the opening of a demat account are as follows:

You can open a demat account online or offline mode.

How to open a demat account online?

Step 1: Go to the Depository participant (DP) website that you want to choose. 

Step 2: Fill out the asked details carefully.

Step 3: Enter the received OTP on your registered mobile number.

Step 4: Fill in the KYC details. ( Date of birth, PAN card details, contact details, bank account details.)

Step 5: Your demat account is opened now. It will be activated within 48 to 72 hours.

How to open a demat account offline?

Step 1: Select your Depository Participant 

Step 2: Submit the required documents.

Step 3: Be present and finish in-person verification ( IPV)

 You will receive your demat account number in both modes, also known as Beneficial Owner Identification Number.

You can check the depository participants (DP) list website from National Securities Depository Ltd ( NDSL) and Central Depository Services Ltd (CDSL).

Note: You can have more than one Demat account but not with the same Depository Participant.

Documents required to open Trading account :

  • Identity proof ( Aadhar card/ Passport/ ration card/Rent agreement/ Electricity bill)
  • Income proof ( Income Tax return/ Salary slip/ PAN card)
  • Photograph 

How to open a Trading Account?

Step 1: Select and decide your stockbroker or firm.

Step 2: Compare the brokerage costs and service they provide.

Step 3: If it suits you, contact them.

Step 4: Now, start applying and fill the KYC details. 

Step 5: Upload all required documents.

Step 6: Send the application for approval.

Step 7: You will receive a call for cross verification or the details you have filled in, or this can also be done in person. 

Now, your trading account is opened. You can have more than trading accounts.

Conclusion:

The majority of Indians are investing in the stock market. The primary step to invest in the stock market is to have Demat and Trading accounts. These digital platforms made the investment process, shares transactions, and keeping track of them a lot easier. 

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