Understanding Demat and Trading Accounts

Demat and trading accounts are closely related but serve different purposes. The biggest difference is that a trading account is used to buy and sell securities on the stock markets. In comparison, a demat account holds all your investments in an electronic form.

Before understanding more about the differences between these two types of accounts, let us know their meanings.

Demat Account

Prior to dematerialization, shares were held as physical certificates. A demat account is required to hold your securities electronically. It is similar to a bank savings account that allows you to deposit and withdraw cash as required. Similarly, a demat account allows you to hold your investments and the same is either credited (buy orders) and debited (sale orders).

Trading Account

According to the Securities and Exchange Board of India (SEBI), you need to open trading account to buy and sell shares. The account may be opened with a registered broker or firm. Every trading account is provided with a unique ID that allows you to execute transactions on the stock market.

Difference between Demat and Trading Accounts

As already mentioned a trading account is used to transact on the stock markets while a demat account holds your securities. Here are two additional differences between these two types of accounts:

Functionality

The primary function of the trading account is to enable buying and selling of shares on the stock markets. Based on your executed transactions, the demat account is either credited or debited for buy and sales trades, respectively. A demat account allows you to hold different types of investments electronically and if required, you may convert these into the physical form.

Nature

A trading account provides a history of your various trades over a period of time. On the other hand, a demat account gives you a summary of your holdings as on a particular point in time.

Interface between Demat and Trading Account for Buy Trades

Assume you place a buy order to buy 500 shares of XYZ Company at ₹ 50 per share. Once the trade is confirmed and executed on the stock exchange, your trading account will be debited by ₹ 25,000 and your demat account is credited with 500 shares of XYZ Company.

Interface between Demat and Trading Account for Sell Trades

Now assume that you want to sell 100 shares of XYZ Company at ₹ 75 per share. On the successful execution of the trade, your demat account will be debited by 100 shares of XYZ Company and your bank account will then be credited with ₹ 7,500.

The entire procedure for buy and sell transactions is simple, quick, and hassle-free when you have an online account. If you do not have an online account, you will need to provide a Debit Instruction Slip (DIS) to your broker with the details of the shares sold to enable him to debit it from your demat account.

Charges on Demat and Trading Accounts

Pricing

In addition to the demat account opening charges, you need to pay the annual maintenance charges (AMC). Service providers may also levy brokerage on executed trades. It is important you check the brokerage as it reduces the net amount you have for investing in various instruments.