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During the times, when there were no such accounts like the Demat account and Trading account existed; investors used to go to the trading floor of the stock exchange and then would trade i.e. buy or sell shares of the companies in the open outcry trading system.
Whatever the number of shares they bought or sold would add or subtract from their share certificate by the broker. And this share certificate was just a paper on which the stocks; the investor held was mentioned and it was also the responsibility of the investor to keep the share certificate safe from wear and tear. So, they would probably keep this in a cupboard or something like that.
But as electronic trading come into existence, it ends the open outcry system as well as the panic of safekeeping the share certificate.
What is a Demat account?
You can say that the Demat account is your digital cupboard where you keep your shares.
It is an account where your shares are stored or get credited when you trade i.e. Demat account holds the shares along with other securities like bonds, ETFs, mutual funds units, etc.
When you open your Demat account with a depository participant (which is usually the brokers) you’re given a Demat account number which helps to identify your Demat account and by which depositories could easily debit or credit shares from your account when you trade.
What is a Trading Account?
The trading account acts as the digital trading floor where there is no need to go to any of the stock exchanges to buy or sell shares.
A trading account provides you with the interface to buy and sell shares in the stock market. It shows you the transactions that you’ve carried out.
Broker provides a trading account number when you open a trading account to help you in market trades and also help clearing corporations to debit or credit money when you buy or sell shares.
You need to link your bank account to your trading account so that you can transfer money from one account to another account i.e. If you want to buy shares; you transfer money from a bank account to a trading account and If you want your profits which you’ve earned during trading in your bank account, you transfer it from your trading account.
A trading account acts as a bridge between your bank account and Demat account as it works to sell your shares in the market by withdrawing them from your Demat account
How trading account acts as a bridge between bank a/c and demat a/c
- During share buying
You transfer money from your bank account to your trading account to buy shares and then after buying you keep those bought shares in your Demat account.
- During share selling
And when you want to sell those shares, you sell them on the stock exchange through a trading account and then transfer the money you get in return during the transaction to your bank account.
Difference between Demat and Trading account
Demat Account | Trading Account |
It is an account where your shares are get stored | It provides you the interface to buy and sell shares |
It shows your current shares and securities holding | It shows you transactions which you have carried out |
If you have a demat account, it saves you from the stress of safekeeping of physical shares | Earlier one had to go to trading floors in stock exchanges to trade, but now you can do that from the trading account |
Its key role is to ensure the safety of shares | Its keyrole is to provide you an easy interface for trading |
Demat account number helps depositories to:
| Trading account number helps clearing corporations to:
|
Demat account and Trading account charges
As you open your Demat and trading account with a broker so the charges that the broker levy on you; count as the charges for your Demat and trading account which are:
- Account opening charge
When you open your Demat and Trading Account with a broker, the broker collects charges from you.
- Brokerage Fee
A broker takes a commission or fee on the services that it is providing you which involves broking services and other services in the case of full-service brokers.
- Demat AMC (Demat Annual Maintenance Charge)
Annual charges for the trading account are generally free but for the demat account, the broker levies a maintenance charge.
- Charge on Off-market transfer
A charge is levied when you transfer your shares from one demat account to another demat account or want to gift shares to someone without involving the stock exchange.
- Dematerialization or Rematerialisation charges
The charges levied on converting a share from physical form to digital form (dematerialization) and converting shares in digital mode to physical share certificate (rematerialization).
Do I need both a demat and a trading account?
It is not necessary to have both accounts but many a time it depends on the situation. As both Demat and trading accounts perform different functions in the online trading process but they make the entire trading process swift and convenient if they’re integrated.
But if someone wants to open only one account; either a Demat account or trading account then the following 2 questions could occur:
- Can I have a demat account without a trading account?
If someone wants to just hold the shares and does not want to trade them for a long duration then he/she can open only a Demat account.
2. Can I have a trading account without a Demat account?
With just a trading account you can trade in futures and options where you do not need to take delivery of shares.
Can I have two demat and trading accounts?
You can open multiple Demat and trading accounts but you can’t open them with the same broker as when you open your Demat and trading account, the broker asks for your KYC documents and if you’re opening more than one account with that same broker it’ll reject your applications as you uploaded the same documents when you’ve created your first account.
So, the clear answer is yes, you can have two (or more) Demat and trading accounts but with different brokers i.e. each account should be with a different broker.
For instance, if you’re gonna open two accounts then open one Demat account with Zerodha and the other Demat account with upstox.
And this is how you end up having two Demat and trading accounts.
Conclusion
There are 2 parts to the trading process: First, you need an interface to trade and then you need an account to take the delivery of the shares which you’ve traded.
The first facility of providing you with the interface for buying and selling shares is fulfilled by the trading account and the latter one is offered to you by the Demat account.
As both Demat and trading accounts perform different functions in the online trading process but they make the entire trading process convenient if they’re integrated.
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