What Is a Demat Account And a Trading Account?

What is a Demat Account?

Demat Account

Demat account is an abbreviation for ‘Dematerialized Account’. It is similar to a bank account. Just like money is kept in your savings account, the shares you buy are kept in your Demat account.

In other words, a Demat account acts as a facility where the shares bought by you are credited and the stocks sold are liquidated. Demat account is used only for storage of stocks and not for transactions (buy/sell).

Quick Facts about Demat Account

Before the internet became popular in India, there were no Demat accounts. Whenever you used to buy stocks, those stocks were bought on paper and share certificates were given. However, there were several limitations to using paper share certificates. They were torn or theft or faced security issues or the ink would fade over time.

Nevertheless, with the advent of the Internet in the mid-1990s, shares began to be held in electronic dematerialized form in the Demat account of the buyers. This resolved most of the limitations of older paper share certificates.

How to open Demat Account and Trading Account

The following documents are required to open a Demat and trading account-

PAN Card
Aadhar card (for address proof) / Aadhar card (for address proof)
Canceled Cheque/Bank Statement/Passbook/Canceled cheque/Bank Statement/Passbook
Passport size photos
Your savings account can be in any private/public Indian bank.

Through that bank, you can open your trading and Demat account.

What is a Trading Account?

Trading Account

A trading account is a medium to buy and sell shares in the stock market. In simple words, it is used to place an order for a stock in the market for the purpose of buying or selling.

Various stockbrokers provide various trading tools to their clients to make their trades simple. Zerodha, for example, is the largest stockbroker in India that offers ‘KITE’ as its platform to trade in stocks. Once you have opened your trading account with a stockbroker, you can place buying and selling orders for your stocks using those platforms.

Demat account vs Saving account vs Trading Account — Demat vs Saving vs Trading Account

Example of Demat and Trading Accounts

Let us understand the difference between the trading account and the Demat account with the help of an example. Let’s say you want to buy 100 stocks of Tata Motors. Here, the sequence during the process will be as follows –

First, you need to have a savings amount equal to or more than the purchase amount in your savings account.
Next, you will transfer money from the savings account to the trading account.
Now, you will buy Tata Motors shares from the stock exchange using your trading account and paying the amount.
Finally, the money is transferred to the seller through your trading account and the Tata Motors shares are transferred to your Demat account.

Now let’s say that after a few months, you want to sell 20 of your 100 shares of Tata Motors. Here the sequence will be as follows –

First, you will place a selling order on the market using your trading account to find the buyer.
If a buyer is found, the shares will be transferred from your Demat account to the buyer.
Finally, the money received by selling your stock will be transferred from your trading account to your linked savings account.
Some other points to know about Demat and Trading Account

Points To Remember

Most of the popular stockbrokers in India open Demat and trading accounts simultaneously (also known as 2-in-1 accounts in India). For example, Zerodha, Angel Broking, 5 Paisa (Zerodha, Angel Broking, 5 Paisa), etc.
Some big stockbrokers (usually bank brokers) also offer 3-in-1 accounts i.e. Savings + Demat + Trading accounts to their clients. For example ICICI Direct, HDFC Securities, etc.
In general, there is no annual maintenance fee for a trading account, whereas this maintenance fee for a Demat account may vary from broker to broker. It is usually around Rs 300-400 per year.
These days, investors and traders can open an instant (paperless) Demat and trading account with leading stockbrokers within 10 minutes. Nonetheless, the offline account opening facility is still popular in India and is offered by all these brokers.
The account opening charges for Demat and trading account also vary from broker to broker. Some brokers offer free account opening. However, most of them will charge somewhere between Rs 300-and 500 to open your brokerage account.
Apart from this, you are also allowed to open multiple Demat and trading accounts using a single PAN card. For example, you can have multiple accounts – one in ICICI direct and the other in Zerodha.
Lastly, choose your broker wisely to open your Demat and trading account if you want to avoid unnecessary charges and risks.

Summary

Let us quickly summarize what we have discussed in this article about trading and the Demat account in India.

A trading account provides a platform to buy or sell a market share. It acts as an intermediary between your savings accounts and Demat accounts. In simple words, it takes shares from your Demat account and sells them in the market.

On the other hand, it takes money from your savings account and buys a share to keep in the Demat account. In addition, a Demat account provides the facility to hold your shares in an electronic dematerialized form.

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