To trade on the stock market, you need two types of accounts: a demat account and a trading account. All kinds of stock trades take place electronically through these two account types.
People are often confused about the difference between demat and trading accounts. But once you understand their functions, there should be no room for confusion. Let’s find out how the two accounts differ.
What is a demat account?
A demat account holds all your shares in digital format. It converts the physical share certificates into the electronic form through dematerialisation. It is like a savings bank account that keeps your money until you withdraw it. Only, instead of money, the demat account holds the shares certificates you own. When you buy securities, your demat account is credited with the new shares. When you sell them, the account debits the sold shares from your existing holdings.
What is a trading account?
To trade shares in the stock market, you will need a trading account. Once you have a trading account, it means that you are registered with the stock exchange. Through this account, you can place orders for the purchase and sale of shares. And it all happens electronically. You cannot buy or sell shares in the stock market if you do not have a trading account.
Difference between demat and trading account
The demat account and the trading account play clearly defined roles in stock trading. Find out how the two accounts differ from each other.
- Difference in functionality
A trading account enables you to place an order in the stock market. This could be a buy order to purchase a set of securities from the market. Or, it could be a sell order to offload a set of securities in the market.
Each time you buy shares, you receive share certificates. Your demat account stores these share certificates. Whenever you buy or sell shares, the certificates are credited to or debited from your demat account.
- Difference in nature
As noted, the demat account stores all your share certificates. So, what does the trading account do? It links up with your demat account and your savings account to carry out your buy and sell orders.
Say, you decide to sell shares in the market. The trading account will execute your sell order. Once this is complete, the certificates for the shares sold will be debited from your demat account. Meanwhile, any sale proceeds will be credited to your linked savings bank account.
- Account opening process
You can open a demat account with a depository participant (DP) such as Kotak Securities or any DPs that are associated with National Security Depository Limited (NSDL) or Central Depository Services Limited (CDSL).
As for opening a trading account, the process is simple nowadays. All you need to do is approach a dependable brokerage firm like Kotak Securities. They will assign you a unique trading ID and you can start trading right away.
As you can see, both accounts have distinct roles to play. Aside from being mandatory for stock trading, your demat and trading accounts simplify the stock trading process and keep all your share certificates in one place. Thus, they enable you to buy and sell securities in a secure and convenient way.