Demat accounts are electronic account forms where you can store all the fund, equities and shares you have purchased from the stock market. Therefore, you need not keep all the share certifications with you. You can convert your physical shares into dematerialized form and keep them in the demat account. A trading account is an online account through which you can make purchase or sale of shares, funds and equities. The trading account is linked to demat account as it needs access to your shares documents while trading. In some cases, the demat accounts and the trading accounts are the same. However, in nature the demat account is similar to a savings account while the trading account is the current account of an individual in the stock market.
Demat is generally for the people who would like to invest in the market and hold the shares in the Electronic form whereas trading account is mostly for traders in derivative segment (Index, Stocks,Commodities, Currencies futures and Options) and those who trade intraday in Cash Segment. Trading account doesn’t attracts any AMC charges whereas demat account attracts AMC charges and generally depends upon the Sharebroker.
What is dematerialization?
The dematerialization system is an alternative to the physical existence of securities, where securities are converted in the electronic form and deposited in a depository account in the investor’s name
What is the need for dematerialization?
The need for an alternative to physical securities arose because dealing in paper entailed risks such as loss in transit, delays in deliveries, theft, forgeries and mutilation of certificates. Also transfer of ownership took very long and there was settlement risk besides the paper work involved. Conversion of securities in the electronic form eliminates these problems
Ways to open the respective accounts
You need to go to the depository participant to open a demat account. You have to fill up the booklet or form required to open a demat account. The cost involved in opening as demat account includes four major charges that are account opening fee, custodian fee, account maintenance fee, and a transaction fee. In addition to this service charge has to be paid to the depository participant. For having a trading account, you already need to have a previous savings account and a demat account. The trading account can be easily opened with little or no account opening security deposit. It just requires having an earlier demat account.
Uses of the accounts
Demat account is to be used only for saving of shares and not for transaction. The main transaction (buying or selling) of shares is done through the trading account. When you purchased the share from the seller the money come into trading account from your savings account the shares bought come from traders and stock market into the trading account. The shares purchased are then transferred from trading account to demat account. During the transaction demat account only comes in the scene with the inflow or outflow of shares from it. However, there are certain misconceptions and confusions regarding their use among consumers.
Difference illustrated with example
The demat account and trading account difference can be illustrated by the following example. If you have a stock A it stays in the demat account in electronic form. Now you intend to buy stock B. In this case, you first transfer money to the trading account. With the help of money from savings account, you buy stock B from trader or stock market. You send the money to the seller and purchases stock B which then goes into the demat account. Moreover, if you want to sell A then A will get transferred from the demat account to the trading account. After the sale of over the money earned is transferred to the savings account.
Demat account stays secured with trading account
The demat account is of two types. One with Power of Attorney and another is without Power of Attorney. In the first case, the broker deducts shares on selling from demat account while in the second case you have to provide delivery instruction to a broker before selling otherwise your shares will go for auction. Hence, the former is a safer one where the shares are securely sold through broker. In a trading account, you don’t face this problem. You have a username and password with which you login and sell the shares and buy shares through this account without any broker interference.