A trading account is not the same as a demat account. Every account plays a different role in the share market. But they often work in tandem. Understanding the difference can help a new investor understand how a stock order proceeds from payment to ownership.
One way to think about them is just this: A trading account allows you to place buy and sell orders. A demat account holds the shares and other eligible securities you own in electronic form. A bank account is concerned with the payment or receipt of money thereof.
What Is a Trading Account?
A trading account is opened with a stockbroker registered with the Securities and Exchange Board of India or SEBI. It is the link between a stock exchange and an investor.
You can search for a listed share, select the order type, enter the quantity and submit the buy or sell order using this account. The broker transmits the order to the exchange. If a corresponding order is found, the trade will be carried out.
The trading account also shows the status of the order, history of the trade, available funds, and other information provided by the broker. It is used mainly for transactions. It is not the main repository of the shares that are purchased.
What Is a Demat Account?
The securities are held in demat account in an electronic form. It eliminates the need for physical share certificates.
This account is opened with a Depository Participant also called DP. A depository can be a bank, broker or financial firm that is linked to a depository. There are two depositories in India i.e. NSDL and CDSL.
Shares purchased via the exchange are credited to the demat account after settlement. On sale of shares it is debited. The account can also hold bonds, exchange-traded funds, government securities and other eligible assets.
Bonus shares, splits, pledges and transfers can also be recorded on demat accounts. It is important to the records of custody and ownership.
Main Difference Between The Two Versions
Purpose is what differentiates a demat account from a trading account.
A trading account is used for placing market orders. The securities for the executed trades are kept in a demat account.
Consider, for example, shopping. The trading account is like an order desk. It requires your order to buy or sell. Think of the demat account as a digital store where the purchased asset is kept.
The two accounts also have different parties involved. The trading account is provided by the stockbroker. The demat account is provided by a SEBI registered DP. The same firm may do both, so they may show up under one app or login. This does not mean they are one account.
How the Accounts Work in Tandem
The process can be broken down into five steps:
- Transfer the funds from your connected bank account to the broker account.
- A buy order is placed using a trading account.
- The stock exchange brings the trade to a head and perfects it.
- The payment is through the market system.
- Shares bought are credited to the demat account.
In a sale, the flow is reversed. You place the sell order via the trading account. Shares are authorised to be debited from the demat account. The proceeds of the sale are then credited according to the broker and settlement process.
Do You Need Both The Accounts?
Both accounts are normally required for delivery based share investing. The trading account looks after the order and the demat account receives and holds the shares.
Some market activity may not result in securities being held after the close of the position. One example is intraday trading. However, brokers often provide a connected trading and demat setup when you open your account.
You also need a bank account to pay for your purchases, and to receive the proceeds from your sales . These three accounts are the common modes of stock investment. You need a bank account to store money, a trading account to place orders and a demat account to hold your investments.
What To Check Before Opening Accounts
- Pick a SEBI registered broker and DP.
- Read the account opening terms and fee schedule.
- Check broking, annual maintenance fees, transaction charges and other disclosed costs.
- Review nomination option and update contact details and KYC details.
- Create a strong password and never share login details, PINs or one-time passwords.
- Periodically check exchange messages, broker statements and demat records.
Conclusion
A trading account and a demat account are two different accounts with interlinked functions. The trading account is used to buy and sell securities on an exchange. The eligible securities are held in the demat account in electronic form.
They are linked to a bank account and they support the entire trade cycle. Learning the roles helps the reader keep track of orders, funds and holdings clearly.
