Difference Between Trading Account and Demat Account

Demat accounts are electronic account forms where you can store all the funds, 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 purchases or sale of shares, funds, and equities. The trading account is linked to the 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 accounts are primarily intended for individuals interested in investing in the market and maintaining their shares electronically. In contrast, trading accounts are more suited for traders active in the derivative segment, including index, stock, commodities, and currency futures and options, as well as those engaging in intraday trading in the cash segment. While trading accounts do not incur any annual maintenance charges (AMC), Demat accounts do attract AMC fees, which typically vary depending on the sharebroker.

What is dematerialization?

The dematerialization system is an alternative to the physical existence of securities, where securities are converted in electronic form and deposited in a depository account in the investor’s name

What is the need for dematerialization?

The necessity for a digital alternative to physical securities emerged due to various risks associated with paper-based transactions. These included the potential for loss during transit, delays in delivery, theft, forgeries, and damage to certificates. Additionally, the transfer of ownership was a prolonged process, presenting settlement risks and involving extensive paperwork. Switching to electronic securities eradicates these issues, streamlining the entire process.

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 a demat account includes four major charges are account opening fee, a custodian fee, an account maintenance fee, and a transaction fee. In addition to this service charge has to be paid to the depository participant. To have 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
A Demat account is to be used only for saving shares and not for transactions. The main transaction (buying or selling) of shares is done through the trading account. When you purchase the share from the seller the money comes into the trading account from your savings account the shares bought come from traders and the stock market into the trading account. The shares purchased are then transferred from the trading account to the demat account. During the transaction demat account only comes into the scene with the inflow or outflow of shares from it. However, there are certain misconceptions and confusion regarding their use among consumers.

Difference illustrated with example
The Demat account and trading account differences 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 the savings account, you buy stock B from a trader or stock market. You send the money to the seller and purchase 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.

The Demat account stays secured with the 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 the demat account while in the second case, you have to provide delivery instructions 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 a 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.