Demat vs. Trading Account: What’s the Difference?

Never has it been easier to invest in the share market than today. With a few clicks of a mouse button and from the comfort of one's home, you can sell and purchase stocks, bonds, and mutual funds. But first, you have to know about two very crucial tools that you must familiarize yourself with: the Trading account and the Demat account.

Most new entrants confuse these terms and use them reciprocally. In reality, they do very different jobs. In this blog, we'll explain the difference between demat and trading account, how each works,how to open a demat account and why you need both of them to trade in the share market.

What is a Demat Account?

“Demat" is short for Dematerialised. Demat account is a kind of account in which the shares and other securities are held in an electronic form, not as a physical certificate. It is like an electronic locker in which your investments are safe.

For instance, when you purchase a company's stocks, the stocks get credited in your Demat account. You never possess a physical certificate but can view your holding on the web via the account.

How Demat Account Works?

When you buy shares in your trading account, shares are settled in your Demat account within two working days (T+2 - 2 business days after the trade date). Additionally, when you sell your shares, securities are deducted from your Demat account and transmitted to the buyer.

Your Demat account can contain a number of different securities, including:

• Equity shares
• Bonds
• Government securities
• Mutual funds
• Exchange Traded Funds (ETFs)

The two major depositories of India that operate Demat accounts are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). The Depository participants (DPs), i.e., the stockbrokers, or the banks provide you with the facility to open and operate these accounts.
If you want to know about what is a Demat account, then imagine a bank account for your investments but not for money.

What is a Trading Account?

While such securities are being held in a Demat account, a Trading account is utilized to buy or sell them in the share market. It serves as the intermediary between your bank account and your Demat account. As and when you want to buy or sell a share, you place an order using your trading account.

On placing a buying order:

• The amount gets debited from the bank account it is linked with.
• The shares are credited in your Demat account.

When you sell shares:

• The shares are debited from your Demat account.
• The sale proceeds are credited to your bank account.

In short, the Trading account is the instrument for execution and the Demat account is the instrument for custody.

Demat vs Trading Account: Key Differences

In order to understand well the difference between demat and trading account, go through the table provided below:

These two accounts are utilized for separate purposes but also rely on one another. You need both of them for a full-time business in the Indian stock market.

Why Do You Need Both Trading and Demat Accounts?

You cannot invest in the stock market via one of the two accounts.

• The shares are debited from your Demat account.
• The sale proceeds are credited to your bank account.

The procedure is described below in a simple manner:

• You give a buy order from your Trading account.
• The shares are purchased from the share market.
• The shares are transferred to your Demat account for holding purposes.

And when you want to sell:

• You give a sell order from your Trading account.
• The shares are debited from your Demat account.
• The funds are credited to your bank account.

It is this dependence that compels you to open both the accounts so that you actively trade or invest in shares.

How to Open a Demat Account?

It is simple and entirely online to open a Demat account in India. To learn how to open a demat account, follow these steps:

• Choose a Depository Participant (DP): This can be a bank, broking firm, or financial portal such as Zerodha, Upstox, Angel One, or Groww.
• Fill Application Form: Input your details such as name, PAN number, Aadhaar number, and bank account details.
• Complete KYC: Upload scanned documents and do in-person verification (IPV) using webcam or app.
• Sign the Agreement: You will have to e-sign a Demat agreement defining the rights and responsibilities of both parties.
• Get Your Login Details: Once you have been authenticated, you receive a client ID and login information to view your Demat account.

It takes around 24 to 48 hours if done through the online channel.

How to open free demat account?

A Free Demat account is also provided by some brokers, especially for registering new investors. While opening is free of cost, make sure you ask about the other charges such as brokerage charges, annual maintenance charges (AMC), and hidden fees.

Steps to open a free Demat account:

• Look for brokers that charge no account opening fees.
• Compare their trading system and brokerage schemes.
• Make sure the user interface is friendly and support is excellent.

Some of the popular ones that have free or low-cost Demat accounts are:

• Indiabulls Securities
• Zerodha
• Upstox
• Angel One
• 5Paisa
• Groww

Always carefully go through the terms and conditions before selecting your service provider.

How to Link Demat and Trading Accounts?

The majority of the investors want to link their Demat and Trading accounts with the same broker, and therefore the process becomes easier. But if your Demat and Trading accounts are of different entities, you will need to link them yourself.

This is how:

• Log into your trading account application.
• Go to the profile or settings menu.
• Input your Demat account number (Client ID and DP ID).
• Provide documents if necessary.
• Wait for confirmation from the broker.

After being connected, your trading account will pull funds from your Demat account to make buying and selling transactions.

Conclusion

Understanding what a Demat and Trading account is one of the first steps in your investment. Your Demat account holds your stocks, and your Trading account allows you to buy and sell them. They are required and complement each other to allow your transaction to move smoothly in the stock market.

With the enhancement in web platforms and simple onboarding processes, opening both accounts is instant and cheap. It is important to choose a decent broker and understand the cost incurred to begin your investment journey without any uncertainty.

No matter if you are an investor or have stayed away from the stock market for some time, these two accounts being known will be the success formula in investing.

For those looking to go a step further in planning their finances, platforms like Indiabulls Securities Limited can help. With their market insights, stock market investment , and user-friendly platforms, helping you choose and understand smart investment tips.

FAQs

1. Can I open a Trading account if I don't have a Demat account?

No, you need a Demat account to hold the securities you buy through your Trading account. You need both accounts for worry-free investing.

2. Must I open both the accounts with the same broker?

Not necessary, but it is convenient to open both the accounts with the same broker. It makes faster execution and fewer compatibility issues.

3. How long would it take to open a Demat and Trading account?

Done online, it usually takes 24 to 48 hours to activate both accounts, provided all papers are successfully verified.

4. Is any fee required to hold a Demat account?

Yes, there is an Annual Maintenance Charge (AMC) in the majority of the brokers. However, there are some brokers providing zero AMC for the first year or on specific plans.

5. Which brokers are the zero free Demat account brokers in India?

There are some brokers which provide a facility of free account opening like Indiabulls Securities, Zerodha, Upstox, Angel One, 5Paisa, and Groww. Make sure to confirm their brokerage and service charges before opening an account.

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