The primary difference between a demat and a trading account lies in their purpose: a demat account is used to hold securities in a digital form, while a trading account is used to buy or sell these securities in the stock market.
- What is a Demat Account?
- What is a Trading Account?
- Difference Between Demat And Trading Account
- How are Trading and Demat accounts interdependent on one another?
- Trading without Demat Account
- How to open a Demat Account?
- How to open a Trading Account?
- Demat Vs Trading Account – Quick Summary
- Trading Account Vs Demat Account – FAQs
What is a Demat Account?
A demat account, short for a ‘dematerialized account,’ is a type of banking account that allows investors to hold shares and securities electronically. This account facilitates easy trade for users and eliminates the risk associated with physical certificates.
Consider an investor, Pratik, who is interested in purchasing shares of Reliance Industries. His first step would be establishing a demat account with a Depository Participant (DP), like Alice Blue. Once Pratik acquires the shares via his trading account, these are securely held in his demat account in digital form, streamlining future transactions.
What is a Trading Account?
A trading account is a specialized account that investors and traders use to buy and sell securities, including stocks, bonds, futures, and other financial instruments. It acts as a middleman between the investor’s bank account and the financial market to make trading easier. Basically, you need a trading account to make transactions on the financial market go smoothly and quickly.
For example, let’s continue with Pratik’s investment journey after opening a demat & trading account. He decides to buy shares of a company. He places an order through his trading account. Once the order is executed, the shares are transferred to his demat account, and the equivalent money is deducted from his bank account through the trading account.
Difference Between Demat And Trading Account
The main difference between a demat account and a trading account is that a demat account holds digital copies of securities. In contrast, a trading account makes it easier to buy and sell securities. A demat account is like a bank locker where securities are kept, and a trading account is like a cashier’s desk where transactions are made.
|Parameters||Demat Account||Trading Account|
|Purpose||Used for holding securities in an electronic form||Used for buying and selling securities|
|Transaction||No direct transaction occurs||Directly involved in transactions|
|Role||Works like a bank locker||Works like a cashier’s desk|
|Linkage||Linked with the trading account and the investor’s bank account||Linked with the demat and the investor’s bank account|
|Ownership||Holds the ownership of securities in electronic form||Facilitates the execution of buy and sell transactions|
|Securities||Holds various types of securities such as stocks, bonds, mutual funds, etc.||Facilitates the trading of securities in the market|
|Settlement||Enables the settlement of securities transactions||Facilitates the settlement of buy and sell transactions|
|Charges||Annual maintenance charges apply||Brokerage fees apply per transaction|
|Statement||Provides a statement of holdings||Provides a statement of transactions and account balance|
|Risk of Loss||Minimal risk of loss due to physical damage or theft||Risk of financial loss due to market fluctuations|
|Dividends||Receives dividends and other corporate benefits||Facilitates the crediting of dividends and corporate benefits|
How are Trading and Demat accounts interdependent on one another?
Trading and demat accounts are interdependent and work hand-in-hand to enable smooth stock transactions. While a trading account is used to place buy or sell orders in the stock market, a demat account stores the purchased securities digitally. In essence, a demat account holds the assets, while a trading account performs transactions with these assets.
For example, when Pratik places an order to buy shares, the order is processed through his trading account. Once the order is executed and the shares are purchased, they are stored in his demat account. Similarly, if Pratik decides to sell his shares, they are debited from his demat account and sold through his trading account. Hence, both accounts are essential for a seamless trading experience.
Trading without Demat Account
While technically possible, trading without a demat account in the Indian stock market is highly limited and practically inconvenient. With the dematerialization of shares mandated by the Securities and Exchange Board of India (SEBI), a demat account has become an essential tool for any significant trading activity.
For instance, consider the hypothetical investor, Pratik. If Pratik wishes to invest in derivatives or engage in intraday trading, he could do so with just a trading account. However, if Pratik wants to buy stocks and hold them beyond the trading day, he needs a demat account to hold these securities electronically. Therefore, a demat account is crucial for the modern investor.
How to open a Demat Account?
Opening a demat account with stock brokers like Alice Blue is a straightforward process that can be completed online. Here are the general steps:
- Visit the Alice Blue website and click ‘Open An Account.’
- Enter your personal details, including your name, phone number, and email address.
- Complete the KYC (Know Your Customer) process by providing documents like a PAN card, Aadhar card, income proof, and a photograph.
- Once your documents are verified, you will receive your demat account details.
How to open a Trading Account?
Opening a trading account with Alice Blue involves a similar process as opening a demat account. Here are the general steps:
- Visit the Alice Blue website and select ‘Open An Account.’
- Fill in your personal details, such as name, contact number, and email address.
- Complete the KYC process by providing your PAN card, Aadhar card, and income proof.
- After verifying your documents, you will receive your trading account details.
Remember that while the process is simple, each step requires careful attention to detail to ensure that the information and documents provided are accurate and up-to-date.
Demat Vs Trading Account – Quick Summary
- A demat account holds securities in a digital format, whereas a trading account facilitates the buying and selling these securities.
- A demat account is essential for holding shares and securities, while a trading account enables transactions in the stock market.
- The major differences between a demat and a trading account are their purpose, role in transactions, and the charges involved.
- Trading and demat accounts are interdependent; the trading account enables buying and selling, and the demat account holds the purchased securities.
- Trading without a demat account is technically possible but has limitations and practical challenges.
- Opening a demat or trading account with Alice Blue involves a simple online process of filling in personal details and completing KYC verification.
Trading Account Vs Demat Account – FAQs
1. What is the Difference Between Demat And Trading Account?
A demat account is used to hold securities electronically, while a trading account is used to buy or sell securities in the stock market.
2. Is trading account and brokerage account the same?
Yes, a trading account is also known as a brokerage account. A broker provides this account and allows investors to buy and sell securities in the stock market.
3. What are the 3 types of brokerage accounts?
The three types of brokerage accounts are as follows:
- Cash Account
- Margin Account
- Retirement Account
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know: