Trading refers to the purchase, sale, or issuance of shares of publicly held companies through the stock exchange. Traditionally, stock trading used to take place physically in the stock market on the floor of the stock exchange but with digitization, online trading has gained popularity.
Online Trading is a fairly new concept vis-a-vis the traditional method of stock trading where verbal communication and sign language was used by the buyers and the sellers to trade physically. Online stock trading has eliminated the physical presence of the trader and has given him/her ease to trade from anywhere, at a click of a few buttons. It is far easier and safer than the traditional method. Getting all the information in real-time and eliminating the middlemen (chain of stockbrokers) has made online trading very popular amongst investors these days.
Along with many other pre-requisites of trading, having a Bank Account, a Demat account, and a Trading Account is important. Before we talk about how we can use Demat and trading accounts, let us first try to understand what exactly are Demat and trading accounts.
What is a Demat Account?
A Demat account (or Dematerialisation Account) is one in which the stocks and shares of an investor are stored in a digital or electronic format. In the past, it was experienced that holding the shares and stocks physically involved risks of such documents getting torn, lost, or damaged and a lot of paperwork was needed in case of transfer or sale. Ease of storing, effortless transfers, and elimination of cumbersome paperwork gave way to the opening of Demat accounts.
What is a Trading Account?
A Trading account is one in which the actual transaction or trade (sale and purchase) takes place. A trading account can be obtained after having registered with an authorized stock broker (can be an individual, a company, or a financial institution registered with and authorized by The Securities and Exchange Board of India (SEBI)). A unique trading ID is assigned with each trading account which allows a trader to trade.
Let us understand all this with a help of a very simple example:
A company XYZ LTD makes its listing on the stock exchange. Person X wants to purchase stocks of XYZ LTD. He/ she will place an order for the same through his trading account which will be processed at a particular time, price, and stock exchange. The shares will be added (deducted in case of sale) to the Demat account and the money required to complete this trade will get deducted from his bank account.
Understanding the Differences
A Demat account holds the shares and securities of an investor in an electronic format instead of physical form whereas a trading account is needed to carry out trade of shares and securities. The difference between the two accounts can be clubbed under the following broad categories:
- Functional differences: While a Demat account is used to hold an investor’s shares and securities, the trading account allows him/her to make actual sales and purchases of the holdings. Mainly Demat account ensures the safety of shares and securities of an investor whereas, a trading account is important to carry out trade on the stock exchange. In case a trader trades in Initial Public Offers(IPOs), shares or debentures, etc, a Demat account is required to deposit such holdings while in the case of Currency derivatives, futures, and options trade, etc, a Demat account is not needed only a trading account is required because all such transactions are settled in cash.
- Differences in the nature of accounts: We can understand this with the help of a very simple example, say a person goes shopping, after he completes his shopping he pays the required amount of money from his wallet to the vendor and keeps the stuff bought in his bag. So here, his wallet is the trading account and the bag in which he kept his stuff is the Demat account.
- Difference in fee and charges: In case of a Dematerialisation account, a trader needs to pay the annual maintenance charge (AMC) every year. The exact amount of AMC varies from one depository participant (DP) to another whereas in case of a trading account the investor doesn’t require to pay anything on opening of such account. Only when a trade is done, charges like brokerage, stamp duty or GST etc are levied to the broker.
- Difference in point of measurement: As we have already understood, the transactions done by a trader over a period of time say over a few weeks or months or years are captured in a trading account. That is why a trading account can also be referred to as an inflow statement. On the other hand, a Demat account is used to deposit the holdings of an investor in an electronic form and therefore it is measured only at a particular time which is primarily at the end of each financial year.
A trading account mainly acts as a bridge between the investor’s bank account and the Demat account. A Demat account also rematerialized upon the request placed by the account holder. Rematerialization refers to converting the holdings back to the physical form. There is no legal limitation on the number of Demat or trading accounts held by a trader per PAN card. One person can have multiple Demat accounts but he/she will have to pay AMC (annual maintenance charge) to multiple depository participants.