Demat account and trading account: both of them are one and the same, right?
Demat account and trading account are very different and serve different purposes. Let’s explore the differences between the two.
Demat and trading account: what are they?
If you wish to invest in the stock market, you need both a demat account and a trading account. But what exactly is the difference between the two?
Well, a demat account is needed to deposit and hold your stocks when you buy them. Think of a demat account as a savings account (or a storage facility) for your stocks. Just like how you can deposit and withdraw money from your bank account, you can deposit and remove stocks from your demat account whenever you like.
On the other hand, a trading account is needed to place ‘buy’ and ‘sell’ orders in the market. A trading account is necessary to conduct any transactions in the stock market. You can register with any online stock broking firm to create an online trading account. When you register, you are provided with a unique ID that allows you to trade in the market.
How are the two accounts different?
Both demat and trading accounts are necessary to trade in stocks. However, they are quite different. Here is an example to help you identify the difference.
Imagine you want to buy a loaf of bread from your local supermarket. You pick a loaf and go to the billing counter. Here, you remove a specific sum of money from your wallet and pay the cashier.
In this example, the money stored in your wallet is similar to stocks stored in your demat account. Removing the money from the wallet and paying the cashier is like trading. For this, you need to have a trading account.
Which account is necessary for which investment?
A major question among investors is: which account do I need to conduct different investment transactions?
Well, let’s find out.
If you wish to trade in stocks, you need to have both trading and demat accounts. Here, a demat account is needed to store your stocks while your trading account is necessary for conducting the transactions.
When is only a demat account necessary?
In case of Initial Public Offerings (IPOs), only a demat account is necessary. When you apply for an IPO and you are allotted shares, the shares are transferred to your demat account.
However, this is applicable only as long as you decide to hold these shares in your account. But if you wish to sell these shares at a later date, you need to have a trading account.
When is only a trading account necessary?
If you wish to trade in instruments such as futures, options or currency, only a trading account is required. However, if you wish to trade in stocks, you require a demat account. This includes even intra-day trading when the stocks are held in your account for a single day or less.
Many investors confuse between trading account and demat account and mix up the two of them. However, the two of them are very different and both of them are required for trading in stocks. Make sure you know the difference before you start your investment journey.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.