Difference Between Demat & Trading Account Online In India | Espresso

What is the Difference Between Demat and Trading Account

When it comes to investing in the stock market, there are two things that any investor must have: A demat account and a trading account. Although both are used for a similar purpose, there is a lot of difference between trading account and demat account. In simple terms, a demat account allows you to store your documents, shares, and other assets in a dematerialized and electronic form, whereas a trading account, as the name suggests, lets you buy and sell those assets. There also exists a 2-in-1 account which is a combination of both demat and Trading accounts.

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Both the accounts are somewhat interrelated and are very useful in trading. To achieve the most by investing in stock markets, you need to understand the specific purpose of these accounts. By the end of this article, you will be aware of the basic differences between a demat and trading account, and the ways they can benefit your investment.

Know More about Demat Accounts

A demat account, also known as dematerialized account, is used to store all physical securities (such as share certificates, mutual fund units and other government securities) in an electronic format. A security is any financial asset that can be traded. Apart from the storage, you can also keep a track of all your investments and funds through your demat account. You can access your demat account via an account number that is given to you when you open the account. What makes a demat account different from other brokerage accounts is that you do not need to have a share to open an account. Your demat account can be a zero-balance account as well.

There are different kinds of demat accounts for different purposes:

  • Regular demat account
  • Non-repatriable demat account
  • Repatriable demat account.

Know More about Trading Accounts

A trading account comes into the picture when day traders want to make a sale and purchase of an asset on the same day. Any investor is defined as a day trader when he makes at least four transactions from his trading account in a day. Trading accounts also hold shares and securities in electronic form, but unlike demat accounts, they are involved in rigorous trading activity. By opening a trading account, you will get a unique trading ID through which you can conduct trading transactions.

A trading account functions like a passage between the bank account of the investor and his demat account. When the shares are bought, the order is placed through the trading account, which after getting processed at the stock exchange gets credit in the investor’s demat account, and the money gets deducted from his bank account. A similar process is followed to sell the shares via a trading account.

There are different types of trading accounts for different functions:   

Demat Account vs Trading Account

By now you might have understood that the difference between a demat and a trading Account is not very stark. However, there are some points which make both of them very different from each other and explain their importance.

  • Functionality: The major difference between trading and demat account is that the former is responsible for storing the shares and assets in electronic form, whereas the latter is used for running transactions of those stored assets. Through the demat account, investors can also convert their electronically saved securities into physical form.
  • Nature of Flow: To simply understand the difference in nature of the two types of accounts, we can compare them to basic bank accounts. A demat account functions like a savings bank account, where you can store all the values, while the trading account works like a current bank account, from where you can make transactions. A Trading account can also be linked to a demat account and a person’s bank account.
  • Charges: A demat account is chargeable, and the monthly or annual fee is to be paid by the investor. The fee usually varies from firm to firm. A trading account, on the other hand, is usually free of cost but can be chargeable in some firms.
  • Measurement: Both demat and trading accounts are measured differently. Since the Trading account goes through continuous transactions, it is measured over specific periods, say one month, two months, or a year. Demat account functions as a storage unit and does not involve a direct transaction, it is measured at a fixed time once a year, usually at the end of the financial year.

Process of Opening a Demat Account

  1. Select a depository participant (DP). Your DP can be any government authorized bank, private bank, online investment platform, or stockbroker who provides these services. Before finalizing the DP, you should thoroughly check their policies and features to make an informed decision.
  2. Fill out the demat account opening form provided by your DP through their website. Make sure there are no errors in the form and complete the KYC (Know Your Customer) by submitting all the necessary scanned documents.
  3. Fulfil the mandatory In-Person Verification (IPV). Depending on your firm, you will either be asked to be present in one of your DP’s offices, or else the IPV will be done via a webcam or any other online meeting platform. IPV is done to authenticate the investor's documents and ensure no foul play is involved.
  4. Once you are done with the IPV, you will be asked to sign an agreement. Make sure you read the entire agreement carefully before signing because it contains all your rights.
  5. Receive your Beneficial Owner Identification Number (BO ID), which will be used to access your demat account.

Process of Opening a Trading Account

  1. Select a broker or a firm providing these services. Compare multiple firms before deciding as many firms offer some discounts.
  2. Fill out the trading account opening form and upload scanned documents to fulfil KYC.
  3. Go through the verification process as directed by your firm.
  4. Receive the trading ID and other account-related information from your firm.

Frequently Asked Questions

You can open a demat account jointly. In fact, a demat account can have up to 3 account holders. But you cannot open a trading account jointly.

Most DPs charge a very minimal or no fee at all while opening a demat account. There is a transaction fee that is charged per transaction, usually on a monthly basis. You may also have to pay Annual Maintenance Charges (AMC). The exact charges vary from DP to DP.

A trading account can be opened for free. However, you may have to pay Annual Maintenance Charges here as well.

Yes, individual BOs (Beneficial Owners) must nominate someone while opening a demat account or a trading account. This makes it the process of transmission of shares after their demise much more convenient.

In case of a demat account, any individual (minor or adult) can open a demat account. The country of residence is also not a factor, as NRIs are also eligible to open demat accounts in India.

As for a trading account, any adult regardless of their residential status can apply for one. Non-individual parties like banks, corporates, mutual funds and trusts can open a demat and a trading account.

A demat account can hold all your shares safely in an electronic form. However, it might not be enough to make trading seamless. Therefore, having a trading account is a good idea. Furthermore, a trading account helps you trade options and futures, which a demat account cannot.