Many people deal with the share market. It is a good source of investing if done wisely. But first, you should know about the Demat and Trading account.
The single significant difference between these accounts is the things you can do with them. Trading helps the trader trade with the stocks, and the Demat account helps hold the stocks.
If you have to tell the difference between Trading and Demat accounts to a layperson in simple terms, then there is this example: Suppose you go to a shop to purchase clothes and have $1000 in your wallet.
You go to a clothes shop, check a shirt’s price, and decide to buy it. Your wallet, in this case, is a Demat account, whereas becoming a Trading account.
Key Takeaways
- A trading account facilitates the buying and selling of securities, while a demat account holds them in a dematerialized or electronic form.
- Trading accounts provide a platform for executing transactions, but demat accounts safely store shares and securities.
- Investors require both accounts to participate in stock market activities, as the trading account enables transactions, and the demat account holds the assets.
Trading vs Demat Account
A trading account is used when a user wants to buy or sell shares in the trade market. It can be workable for a short period as stocks cant be held for a long time. A Demat account is a storage account in which users can save their assets. It is used to hold shares and stocks in electronic form.
Comparison Table
| Parameter of Comparison | Trading account | Demat account |
|---|---|---|
| Nature of transaction | Dealing in capital transactions. | We are dealing in shares. |
| Period | The trading account is measured over a period that is not fixed in terms of date or year. E.g., it can be calculated for 1 or 6 months. | Demat account is measured in terms of the financial year, from April 1st to March 31st. |
| Functionality | The primary purpose of the Trading account is to enable the Trader to buy and sell securities. It is the flow of the transaction. | The primary purpose of the Demat account is to hold the investments in electronic format. It is in stock. |
| Impact of transaction | When you purchase shares, money gets debited from your Trading Account. | Shares get credited to your Demat account. |
| Selling bonds | You don’t need a Trading account to sell Bonds. | You need a Demat account to sell Bonds. |
| Investing in IPOs | For just investing in IPOs, a Trading account is not required. | You need to have a Demat account to invest in IPOs. However, for selling shares, you require both Demat and Trading understanding. |
| How does it help? | A trading account facilitates the selling and purchasing of stocks. | The Demat understanding helps in retaining stocks. |
| Deals | If you want to deal in options and derivatives, then a Trading account is enough. | If you want to hold shares, then a Demat account is enough. |
What is Trading Account?
Usually, People who regularly deal in shares have their Trading account. Trading account holders can hold different instruments like cash, securities, etc.
It is supposed to be operated under the regulations of FINRA – Financial Industry Regulatory Authority. There are different types of Trading accounts, such as Online Commodities Trading accounts, Online Derivatives Trading accounts, Online Forex Trading accounts, etc.
The trading account is opened for short-term trading. Stocks in the Trading account are not being held for a longer duration of time. The trading account contains all the information like the profit/loss, speed of executing the trading orders, settlement of the charges, etc.
What is Demat Account?
Demat is the short form of a Dematerialized account. Earlier, the shares were available as certificates in physical form. But there was a possibility that it may get torn or stolen.
So Demat account was introduced to hold the shares in electronic form. One Demat account is enough to have a wide range of investment instruments like Mutual funds, Bonds, shares, etc. The investor can deal with claims from this account.
Many banks help investors in opening a Demat account. Banks help individuals in opening Demat accounts free of cost. The person has to pay the Annual Maintenance Charges.
Main Differences Between Trading and Demat Accounts
- Flow book and Stock book – A trading account can also be referred to as a Flow book, whereas a Demat bill can be referred to as a Stock book.
- Charges involved – Both accounts attract different kinds of tasks. For the Trading account, Trader needs to pay one time during the opening of the report, and apart from it, there are charges like GST, Turnover tax, Stamp duty, Exchange charges, etc. The Demat account has annual maintenance charges, Transaction fees while purchasing or sharing shares, and Custodian charges.
- Approval of Regulatory authorities – For the Trading account, no consent is required from regulatory bodies like NSDL or SEBI. But for the Demat performance, it is needed.
- Suitability – A trading account is suitable for people who purchase and sell stocks in a short frame of time. Demat is for those who want to hold stocks for a longer duration of time.
- Type of person – A trading account is suitable for professionally dealing with stocks. Demat is ideal for people who are not regularly dealing with shares.
- Nature of transactions – In the Trading account, you mainly deal in capital transactions, and Demat account, you deal in shares and stocks.
- Comparison – A trading account is more like your current account as people dealing in a Trading account are professional stockbrokers who use it for business purposes. A Demat account is something that any individual opens, just like a savings account. Banks encourage normal salaried individuals to open Demat accounts who want to deal in stocks.
- Opening the accounts – Opening both accounts involves a different set of procedures.
- Account name – Demat account can also be referred to as the Ownership account, as you hold shares purchased in this account. A trading account can be referred to as a Transaction account as it enables you, the Trader, to execute the buying and selling of stocks.
- Account Type – A trading account can be 3-in-1 or 2-in-1, but the Demat account is always single.
- Operated by – The trading account is operated by brokerage firms, whereas a Central depository operates the Demat account with brokerage firms who act as third parties.
- https://www.ripublication.com/gjmbs_spl/gjmbsv3n7_14.pdf
- https://pdfs.semanticscholar.org/a304/2f8a6d9a6fb597d86a684124f6a8874a103c.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
