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 major difference both this account is the things that you can do with them. Trading helps the trader in trading with the stocks and the Demat account helps in holding the stocks.
If you have to tell difference between Trading and Demat account to a layman in simple terms then there is this example: Suppose you go to a shop to purchase clothes and if you have $1000 in your wallet. You go to a clothes shop and check the price of a shirt and decide to buy it. Your wallet, in this case, is Demat account whereas becoming the Trading account.
Trading vs Demat Account
The difference between Trading and Demat Account is that a Trading Account is an interface to transact which helps in buying and selling shares in the stock market. A demat account is a storage place which keeps the shares and securities, i.e., Bonds, Mutual Funds Units etc. in digital mode.
Comparison Table Between Trading and Demat Account (in Tabular Form)
|Parameter of Comparison||Trading account||Demat account|
|Nature of transaction||Dealing in capital transactions||Dealing in shares|
|Period||The trading account is measured over a period that is not fixed in terms of date or year. For eg it can be measured for 1 month or 6 months.||Demat account is measured in terms of the financial year which is normally from April 1st to 31st March.|
|Functionality||The main purpose of the Trading account is to enable the Trader to buy and sell securities. It is the flow of the transaction.||The main purpose of the Demat account is to hold the investments in electronic format. It is the stock.|
|Impact of transaction||When you purchase shares money get debited from your Trading Account||Shares get credited to your Demat account|
|Selling bonds||You don’t need a Trading account for selling Bonds||You need a Demat account for selling Bonds|
|Investing in IPOs||For just investing in IPOs, 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 account.|
|How does it help?||Trading account facilitates selling and purchasing of stocks||The Demat account helps in retaining stocks|
|Deals||If you just want to deal in options and derivatives then Trading account is enough||If you just want to hold shares then Demat account is enough|
What is Trading Account?
Normally, People who regularly deal in shares have their Trading account. Trading account holders can hold different kinds of 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 account, Online Derivatives Trading account, Online Forex Trading account, 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 orders, 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 single Demat account is enough to hold a wide range of investment instruments like Mutual funds, Bonds, shares, etc. The investor can deal with shares from this account.
Many banks help investors in opening a Demat account. Banks help individuals in opening Demat account free of cost. The person just has to pay the Annual Maintenance Charges.
Main Differences Between Trading and Demat Account
- Flow book and Stock book – Trading account can also be referred to as Flow book whereas Demat account can be referred to as a Stock book.
- Charges involved – Both the accounts attract a different kind of charges. For the Trading account, Trader needs to pay one time during the opening of the account and apart from it, there are charges like GST, Turnover tax, Stamp duty, Exchange charges, etc. In the Demat account there are charges like Annual Maintenance charges, Transaction fees while purchasing or sharing shares, Custodian charges.
- Approval of Regulatory authorities – For the Trading account there is no approval required from regulatory bodies like NSDL or SEBI. But for the Demat account, it is required.
- Suitability – 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 – Trading account is suitable for a person who is professionally dealing with stocks. Demat is suitable for people who are not regularly dealing in shares.
- Nature of transactions – In the Trading account, you mainly deal in capital transactions, and Demat account you deal in shares and stocks.
- Comparison – Trading account is more like your current account as people dealing in Trading account are professional stockbrokers who use it for business purpose. Demat account is something that any individual opens so it is just like a savings account. Banks encourage normal salaried individuals to open Demat account who want to deal in stocks.
- Opening the accounts – Opening both the accounts involves a different set of procedures.
- Account name – Demat account can also be referred to as the Ownership account as you hold shares that are purchased in this account. A trading account can be referred to as a Transaction account as it enables you to the trader to do execute the transaction of buying and selling of stocks.
- Account Type – Trading account can be 3-in-1 or 2-in-1 but the Demat account is always single.
- Operated by – Trading account is operated by brokerage firms whereas the Demat account is operated by Central depository with brokerage firms who act as third parties.
Online trading has changed how people are dealing in the share market and both these accounts – Trading and Demat are the important pillars of your investment in the stock market.
Depending on your investment priorities, you can decide whether to open both the Trading and Demat account or only Demat account. If you are going to professionally deal in the stock market then buying both the accounts makes sense or else you can purchase just Demat account.
It is advisable to take the help of a good broker initially till you understand about dealing in the share market. Once you understand the nuances of the trade then you can again set your investment priorities.