In this article, we will discuss trading account and demat account meaning and how they are related to the stock market. Many beginners think that trading account and demat account is the same thing. But the trading account is a different thing and demat account is different. So let’s know what are the differences between them.
Whenever a person becomes interested to participate in the stock market, he or she needs to open an account with a broker, this is called trading account and demat account. Trading account is the place where you buy or sell your shares. And demat account is the place where your purchased shares are kept.
Before many years, till the late 90’s the shares used to be in physical paper formats on which the shareholder’s name, date of birth, other details etc were mentioned. It was also mentioned on the physical share certificates that the shareholder has been given with X number of shares. Check the image below for a sample physical format share certificate.
But on the late 90’s the physical share certificates have been converted into electronic form. As we know that our money can be in 2 forms – one which is kept in our wallet or the one which is kept in our bank. The money that is kept in the bank is in electronic form. You can send or receive money in electronic form. For that, you don’t need to send or receive any physical money to anyone. Similarly, the physical share certificates were also converted to the electronic form which created an immediate ease in buying or selling of shares.
Previously it was a hectic job to sell a share which needed transferring the name of shareholders. So the process of dematerialization evolved which simplified this process of share buying and selling and shares were now kept in demat form in a custody. When someone buys some shares they are transferred to the custody and when he sells those shares are transferred from that custody. That custody is called a demat account. So the basic concept of trading account and demat account meaning is clear now.
Trading Account And Demat Account Meaning In Simple Example:
Suppose Ravi runs a shop where he sells various items. Ravi also has a godown, where he warehouses his items that he sells from the shop. He purchases the items and keeps them in the godown and whenever he sells any item that is delivered from the godown through the shop. So, in simple terms, demat account is just like a godown and trading account is like a shop. These shops and godowns must be established at the same time to run a business. Similarly, whenever you think of trading in the market you need to open trading and demat account at the same time.
The trading account remains under control of a broker, who charges some small brokerage and in return buys or sells your shares, because you can’t buy or sell your shares directly. If you don’t have a trading or demat account already, you can open a trading and demat account instantly online using Aadhar card. To open a trading and demat account you need to provide some basic KYC documents like your PAN card, aadhar card, bank statement, photograph, cancelled cheque etc.
The main difference in the trading account and demat account meaning is when you purchase a share for few days or few months or few years, they are not kept in the trading account. Rather the shares are transferred to the demat account. So they are kept in the godown. These godowns are maintained by two government companies, NSDL or CDSL who are called as the central depository participants. Our brokers account with these government organizations and they finally offer the demat service to us.
So, you have understood that whenever you will buy a share it will be transferred to the godown or demat account and whenever you will sell the share it will be taken from the godown or demat account and will be given to the share buyer. And you don’t need to do all these jobs, your broker will do this for you whenever you will buy or sell a share. For all these jobs the broker will charge a small fee from you, that is called brokerage charge.
The main difference between the trading account and demat account meaning is that in the trading account you can buy or sell stocks or shares, futures or options, commodities as well as currencies. But in the demat account, only the shares or whom you have taken delivery, they will be stored. Whenever you are now selling all those delivery shares, they are taken back from the demat account and given to the buyer.
Suppose you are selling State Bank of India 100 shares, the shares were lying in your demat till that day. On or within next 2 days after the trade date, those shares will be taken out of your demat and will be credited to the buyers demat. This TRADE DATE + 2 DAYS, is known as T+2 Settlement. The money that you were to get by selling the shares will be credited to your trading account on or within that T+2 settlement date. Once again you need not to worry about all the steps as these steps are automatically managed by brokers.
The trader only needs to buy or sell the shares in his trading account and the rest will be automatically managed. No signature is necessary, no physical headache. This is the power of demat account. If you still are not clear about demat account opening procedure you can check this post.
I hope that trading account and demat account meaning is now clear to you. There are many brokers who can offer you trading account and demat account. There can be some full-service brokers and some discount brokers. Based on the technology and brokerage charges we recommend you to open an account with Zerodha, India’s leading discount stock broker.