In this article, we will discuss the trading account and Demat account meaning and how they are related to the stock market. Many beginners think that a trading account and a Demat account are the same things. But the trading account is a different thing and the Demat account is different. So let’s know what are the differences between them.
What is the Trading and Demat account?
Whenever a person takes an interest to participate in the stock market, he or she needs to open an account with a broker. We call this a trading account and a Demat account. A trading account is the place where you buy or sell your shares. And Demat account is the place where the broker keeps the shares you purchased.
Before many years, till the late ’90s, we saw the shares in physical paper formats on which the companies mentioned the shareholder’s name, date of birth, other details, etc. They also mentioned on the physical share certificates that the shareholder has got X number of shares. Check the image below for a sample physical format share certificate.
The Concept of Demat Account
But in the late ’90s, we saw the conversion of the physical share certificates into electronic form. As we know that our money can be in 2 forms – one which we keep in our wallet or the one which we keep in our bank. The money that we keep 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 immediate ease in buying or selling of shares.
Previously it was a hectic job to sell a share that needed transferring the name of shareholders. So the process of dematerialization evolved which simplified this process of share buying and selling. The brokers started keeping the shares in Demat form in custody. When someone buys some shares the broker transfers them to the custody and when he sells those shares, they transfer them again from that custody. We know that custody is a Demat account. So the basic concept and meaning of trading account and Demat account are clear now.
Real-Life Example of Trading Account and Demat Account
Suppose Ravi runs a shop where he sells various items. Ravi also has a godown, where the warehouses the 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, a Demat account is just like a godown, and a 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 a Demat account at the same time.
The trading account remains under the 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 an 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, canceled cheque, etc.
Difference Between the Two Types of Accounts
- The main difference between the trading account and the Demat account is when you purchase a share for a few days or a few months or a few years, you can not keep them in the trading account. Rather the broker transfers the shares to the Demat account. So the broker actually keeps the shares in the godown.
- Two government companies, NSDL and CDSL, maintain these godowns. We know them as the central depository participants. Our brokers have accounts 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, which is called a brokerage charge.
- The other difference between the trading account and the Demat account 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 will be stored. Delivery shares are taken back from the Demat account and given to the buyer.
Is it compulsory to open a trading account with a Demat account?
Yes, of course, it is compulsory to open a trading account with a Demat account. Through the trading account, only the execution of buying-selling of shares happens. This is the only work of a trading account. So, after purchasing shares, there should be a separate account where the broker needs to deposit those shares. Demat accounts hold those shares and work like bank a/c.
A trading account is like an investment account through which investors or traders place buy-sell orders in the stock market. Simply, the trading account is the trader’s primary account. The investor compulsorily requires it for buying and selling shares from the market.
A Demat account is as same as a bank account. The only difference is, instead of holding money, the Demat account holds shares. Securities are held in the dematerialized (electronic) form in the Demat account. After buying-selling of shares, they deposited them in the Demat.
Yes, of course, you can have two or multiple Demat accounts using the same PAN card. But the thing is, you cannot open multiple accounts using the same PAN card under a single broker. In that case, you have to open accounts under multiple brokers.
Yes, anyone who has a PAN card and a mobile-linked Aadhar card, can open a Demat account online. After the e-sign process, you need to verify your account with a TOTP.
Example of Functioning of Both Types of Accounts
Suppose you are selling State Bank of India 100 shares, the shares were lying in your Demat till that day. On or within the next 2 days after the trade date, those shares will be taken out of your Demat. The system will credit them to the buyers’ demand. 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 worry about all the steps as these steps are automatically managed by brokers.
The trader needs to buy-sell the shares in his trading account and the rest will be automatically managed. No signature is necessary, and no physical headache. This is the power of the Demat account. If you still are not clear about the Demat account opening procedure you can check this post. You can check the video below to understand what a trading account and a demat account are in more detail.
I hope that the meaning of trading account and Demat account is now clear to you. There are many brokers who can offer you a trading account and a demat account. There can be some full-service brokers and some discount brokers. We recommend you open an account with Zerodha, India’s leading discount stockbroker.