As Heraclitus said, “There is nothing permanent except change.” In these 75 years after Independence, India has come a long way. A lot has changed in terms of how we operate, and our investment behaviour is no exception. Our ways of making money, trading and investing have evolved with time and we are now much more aware and conscious of our investment decisions. Instead of preferring to invest in fixed income instruments, young investors today are investing in markets and market-linked products
If you are the one who wants to start investing in the stock market, you must be aware of the few basics. To start this investment journey, you are required to have a demat account and a trading account. Even though these two accounts are important, many people do not know about their differences. So, in this blog, let us get down to the basics and look at these two terms separately to understand the difference between them.
What is a Demat account?
A demat account (dematerialised account) is simply a digitally functioning account that allows you to hold dematerialised securities, including stocks, mutual funds, bonds, etc. It acts as a repository to hold the securities you purchase in an electronic form. For example, if you have some physical shares then you can hold them in digital format by opening a demat account.
The working of a demat account is quite like that of a bank account, which lets you keep your money, and you also have the option of depositing or withdrawing cash. In your demat account too, the shares are stored and accordingly debited and credited. You are not required to have any shares to open or maintain a demat account. You can have zero balance in your demat account.
Types of Demat account
Demat accounts can be broadly classified into three major types:
1. Regular Demat account: If you are an Indian citizen who resides in the country then this account is ideal for you.
2. Repatriable Demat account: This type of demat account is for non-resident Indians (NRIs), which enables money to be transferred to various foreign countries. However, this type of demat account needs to be linked to a Non-Resident External or NRE bank account.
3. Non-RepatriableAccount: This is again for those who are residing outside of India but with this type of demat account, the investor is barred from transacting any fund from abroad. Also, this type of account needs to be linked to a Non-Resident Ordinary or NRO bank account.
What is a Trading Account?
A trading account is mandatory for conducting your stock trading activities. It provides you the interface to purchase and sell securities in the stock market. While a demat account stores the securities in a digital format, a trading account is used for purchasing and selling securities in the stock market. Both the accounts are vital to carry out any trading activity effectively.
Types of Trading account
1. Equity and derivatives trading account: This is the most common type of trading account that enables trading in shares, futures, and options. You can either make the trades online conveniently from your home or offline by asking your broker to act on your behalf. All your transactions will be processed in T+1 days.
If you trade in futures and options, you do not require a Demat account as it expires within a specific time frame. However, you might require a Demat account if you are dealing with stocks.
2. Commodity trading account: A commodity trading account is required if you want to trade in Multi Commodity Exchange (MCX). You will be able to freely transact and trade in commodity futures and options once you open a commodity trading account. Even here, all your transactions will be processed in T+1 days.
3. Discount broking account: These are perfect for stock traders who deal in large quantities of stocks. These accounts are limited in their ability to provide various additional services and charge a lower fee. However, by payment of specific fee, the services like call and trade options can be availed.
You can open a 2-in-1 account or any of the accounts as an investor. A few bank-based broking institutions sometimes offer 3-in-1 service accounts. You have this choice when you open an account with a bank-based broking firm. Along with the trading and demat account, it provides hassle-free banking services.
Difference Between Demat and Trading Account
| Demat Account | Trading Account |
| A demat account is used for holding shares in electronic form that you purchase in the share market. | A trading account works as a link between your bank account and demat account. |
| A demat account will have a unique ID number, which will be used for uniquely identifying your account. | A trading account will have a unique trading ID, which will be used to trade in the share market. |
| A demat account can hold financial instruments like equity shares, mutual funds, exchange traded funds, and government securities. | A trading account only helps in the act of buying and selling the securities, and notin holding any financial securities. |
| The purpose of a demat account is to ensure the safety of shares held. | The purpose of a trading account is to allow you to carry out hassle-free trading transactions in the stock market. |
To Sum Up
Trading in the stock market is becoming easier and more convenient. If you wish to trade in the stock market, it’s necessary to understand the fundamentals of demat and trading accounts. You need to have both accounts to trade in equity. To learn how to open both accounts, you can get in touch with the broker.
I hope you find this blog helpful. Share your thoughts in the comment section below.