To invest in the stock market, one needs to be aware of those few basics. Two critical requirements needed to trade involves having a Demat account and an online trading account. Most new investors are unclear about the difference between Demat and trading account. This is why it is essential to understand the benefits and features of each component to begin trading.
What is a Demat account? Simply put, a Demat account enables you to hold your shares and securities electronically. It transforms your physical stocks into the electronic format. This is known as the dematerialisation, and hence the term Demat. To open a Demat account, you are required to provide a Demat account number to settle your trades electronically. Just as you maintain your cash in a bank account and have the freedom of depositing and withdrawing when needed, a Demat account works in the same manner. You can mould your shares and securities in a Demat account and the debit or credit it when required. You can open a Demat account with zero shares and can also maintain a zero balance in a Demat account.
A trading account, on the other hand, is critical in conducting stock trading activities. When a company lists its shares and securities in the stock market, you can purchase those shares through the trading account electronically. A trading account and a Demat account can be obtained by registering with a reputed stockbroker or depository participant such as Kotak Securities. Through a trading account, you are allotted a unique trading identification that is critical in conducting online trading.
Here we look into the main areas between a Demat and trading account.
Functionality: a critical difference between Demat and trading account relates to the roles of each account. You make the use of a trading account to buy and sell shares while these get debited from your Demat account on the stock market. Your Demat account keeps your shares and securities in an electronic format, safely.
Characteristics: a trading account is linked to your Demat account and your bank account. It withdraws the shares from your Demat account in order to sell it on the market. A Demat account is a repository where you buy from the market and stored your stocks and securities in it. In other words, a Demat account functions like a bank savings account, while a trading account operates like a current bank account.
Functions: regardless of the difference in Demat and trading accounts, they are white and trade in the share market. As an investor, you use your trading account to purchase the shares of a company. This amount is withdrawn from your bank account and is reflected in your Demat account where it is also stored. In the same manner, when you are selling company shares through the Demat account, it is withdrawn from your Demat account. You receive the money from the sale into your bank account.
Hence, although there is a sharp difference between a Demat account and trading account, it is mandatory to have both accounts to trade in the stock market.
