Owing to the convenience of the online trading system, a growing number of individuals have started stock trading to create an alternative income stream. Demat and trading accounts have simplified the process and played a key role in online stock trading. You should know about both accounts before foraying into the stock market.
Table of Contents
What is a Demat Account?
A demat account is an online storage to hold your stocks, bonds, mutual fund units, government securities, and other financial assets electronically that can be traded in the stock market using a trading account.
What is a Trading Account?
A trading account is an online account that allows you to place buy/sell trade orders on the stock exchange. It is the entry gate for investors to trading platforms linked to multiple formal stock exchanges.
Differentiating Factors for Demat Account vs Trading Account
The Functionality
To understand the functionality of a demat account, you can consider it similar to a bank account. Your bank account gets debited with the propionate amount when you withdraw funds and credited when you deposit money. In the same way, your demat account gets credited with the securities when you buy them and gets debited when you sell them. It is a record of your financial assets.
In contrast, your trading account is a record of your trading flows. When you need to buy some securities, you add money to your trading account through your linked bank account, and when you sell your securities, it gets credited with the funds you can transfer to your bank account.
The Nature
A demat account is a repository for your financial investments that maintain all those investments’ records. It is a repository for unlisted stocks, also. Contrarily, a trading account is used to place a trade on stock exchanges for your demat securities. You can trade only listed stock using your trading account.
Significance:
The demat account helps track your investments and shows where your investment portfolio value stands. On the other hand, trading accounts help determine what kind of your trades bring success or failure.
Charges Involved:
Demat account charges include account maintenance charges (AMC), demat debit and credit transactions, custodian charges, and others. Trading account charges include account opening charges and brokerage collectively that combines fees and taxes.
Service Provider:
You can open a demat account with a depository participant registered with any of the central depositories – the NSDL (National Securities Depository Ltd) and the CDSL (Central Depository Services Ltd). If you need both a demat and trading account, you need to approach a stockbroker registered with the Securities Exchange Board of India (SEBI) to offer online trading services.
Primary Users
Investing and trading are two different approaches to taking advantage of stock market opportunities. Investors generally seek higher returns through buying and holding financial securities. Therefore, their primary account is a demat account. On the contrary, traders enter and exit positions in the market over a shorter time frame to profit smaller but more frequently during rising and falling markets. It makes trading accounts their primary account.
Types of Accounts
A demat account can be a basic service demat account (BSDA) with a limited holding value of Rs.2 lakhs, a regular demat account to hold all your investments without any upper cap, an NRI-NRE Demat Account or an NRI-NRO Demat account for NRI investors. In contrast, trading accounts can be classified based on the securities you want to trade. It can be an Equity and Derivatives trading account or Commodity Trading Account. Also, it can be a margin trading account for day traders.
Conclusion
Thus, these two accounts are required to trade financial assets. Both are different in nature and functionality but work together to make the process of stock market investments hassle-free.
