If you are new to the stock market, you might be confused between a demat account and a trading account.
No worries, I have explained the difference between Demat and trading accounts in a simple manner in this article.
Without wasting time, let’s start.
What is a Demat Account?
A demat account or Dematerialised account keeps your stocks in digital or electronic form.
Earlier we had to hold the physical papers of the purchased stocks but now they stay in your Demat account until you sell them.
When you buy any stock, the stock sends to your Demat account. This process is called stock delivery.
For example, if you want to buy Infosys shares, you will need a Demat account that will store your bought Infosys shares in digital form. You don’t get any physical paper proof for your stock purchases.
You can even open multiple Demat accounts for separate services such as stocks, mutual funds, and bonds.
You now come to know how you can store your purchased shares, but do you know how you will buy those shares? Let’s discuss this in the next section.
What is a Trading Account?
The trading account helps you to buy or sell your stocks in the stock exchange.
Taking the previous example, if you want to buy Infosys shares, you need a trading account to buy the stocks.
To buy a stock, you first transfer the required amount of money from your savings account to your trading account, then you use that money in your trading account to buy the required shares.
Similarly, a trading account also allows you to sell the stock.
For example, if you buy 10 shares at a price of Rs. 100 per share by paying Rs. 1000 and sell when the price moves upward at Rs. 105.
Now you could do buying and selling with the help of your trading account.
A trading account is basically an intermediate between you and the stock market that allows you to trade stocks in the share market.
Difference Between Demat Account and Trading Account
#1. Nature and Functionality
Demat Account is for storage of stock whereas trading account is for movement of stocks either buying or selling.
A Demat account is similar to your savings account in the bank, whereas a trading account works like your current account.
When you buy shares for delivery in the stock market, your trading account buys those shares and deposits them in the Demat account
Stock delivery means you buy some shares and keep them for some days, months or years.
When you sell your already bought stocks, your trading account withdraws shares from your demat account and sells in the market.
#2. Role of Demat and Trading Account
Both play important roles in the investment as well as trading in the stock market.
Demat account is required when you buy a stock to hold for a long period, your purchased stock is stored in the demat account.
A trading account is needed to buy or sell shares whether for delivery or for intraday trading.
#3. Account Opening and Maintenance Fee (AMC)
You have to pay account opening charges for both demat and trading account.
However, some brokers only charge a trading account opening fee but you don’t have to pay any maintenance fee for the trading account.
You can see IIFL charges Rs. 295 for trading account opening fee.
They don’t charge any account opening fee for demat account but they charge account maintenance charges (AMC) to maintain demat account.
For an instance, Zerodha charges Rs. 300 per year (actually Rs. 75 per quarter) as demat account AMC but they don’t charge AMC for trading account.
#4. Margin Leverage
Margin is important for a stock trader because margin allows you to trade for higher amounts even if you have less cash in your trading account.
So your trading account allows you to take benefits of margin leverage.
Since Demat account is kind of your digital storage, you don’t get any margin leverage benefits with demat account.
But when you buy stock delivery (which means you buy and hold for some days, months or years) then Demat account comes into play.
#5. Account Closing Procedure
You can open a demat and trading account together that we’ll discuss in detail in the next section.
But the closing procedures of both accounts are different.
#1. Trading account closing procedure
Closing a trading account is simple.
You can simply write an email to your broker’s helpdesk or call customer support and ask them to close your trading account. Simple.
Make sure to withdraw the funds to your savings account from the trading account before escalating the closure application.
#2. Demat account closing procedure
Closing a demat account is complicated.
If you have a demat account with a discount broker like Zerodha or Upstox then you may find their account closure form on their website but most of the brokers don’t have a standard process for demat account closure.
Secondly, if you have a full service demat broker like ICICI direct, then it’s very tough to close your demat account.
Things to keep in mind while closing demat account
- You have to reach out to their offline branch to submit the application and most of the branches are in metro cities only.
- You don’t have any shares holding in your demat account. Either sell them or transfer to another demat account using DIS (Delivery Instruction Slip).
- Make a checklist of important points you have to fill in the form and double check before submitting.
How to Open Demat & Trading Account
You can open a demat and trading account simultaneously.
You need to reach out to any broker such as Zerodha to open the demat and trading account. Then follow their step by step process to open the demat account.
Every broker has their own portal to create the demat account but the basic procedure is common.
Let’s understand what steps you need to know to open a demat account.
#1. Keep Your Documents Handy
Before proceeding to open your demat/trading account, keep the following documents ready.
- PAN Card
- Aadhaar Card
- Your signature on blank paper
- Cancelled cheque with your name printed on it
If you don’t have personalized cheque with your name printed on it, then you can go for –
- Bank statement containing your Name, Bank Account Number, IFSC and MICR codes
- Bank Passbook IFSC and MICR codes
You must take care of the following things
- Your mobile number must be linked with Aadhaar for online verification
- Your webcam should be working if you are applying from a laptop or desktop computer.
- You need scanned copies of all of your required documents
- If you are applying from your smartphone, click clear images of your required documents in your phone.
#2. Visit the signup page of your broker
You can visit the signup page of your broker. You have to enter your mobile number to proceed as shown below.
Some portals may ask for your email address as well at the first step.
You will need to enter the OTP received on your registered phone number.
#3. Enter Your Personal Details
Once you have signed up, you have to fill in the personal details like parents name, address, marital status, and occupation details.
#4. Select Brokerage Plan
Now you have to select the brokerage plan if the broker offers multiple plans. If you are a beginner, always go with a basic plan.
When you have got some stock trading experience, you can upgrade to a premium plan.
#5. Bank Details
You have to enter your bank details that you want to attach with your trading account.
#6. IPV (In-person Verification)
You have to go through online In-person verification by uploading the scanned image of your signatures on blank paper and by clicking your selfie online from the portal.
Some portals may ask you to record your video online and upload
You will better understand by seeing the screenshot below.
#7. Upload Your Documents
Now you will have to upload your documents scanned copies like PAN card, cancelled cheque or bank statement.
#8. Esign with Aadhaar KYC
You have to e-sign your application form by verifying it through online Aadhaar verification.
You may be redirected to a third party portal such as digio or digilocker.
Some portals move you directly to NSDL (National Securities Depository Limited) website for Aadhaar verification.
You will get an OTP on your mobile number linked with your Aadhaar number. You will enter that OTP to verify your Aadhaar number.
Once your Aadhaar number is verified, you will see a button “E-sign Now”.’
When you click on “e-sign now”. It takes a couple of seconds and your account opening process is completed.
You get a confirmation email about account opening within 2-4 days from your broker. You will also get your user id and a link to reset your password.
Once the account is opened you can use their web based platform or mobile trading app for stock trading.
Demat account vs Trading Account FAQs
#1. Do I need both demat and trading account?
The answer is both Yes and No.
Yes. if you are into stock trading, you need both demat account and trading account. You need trading account to buy/sell the shares and demat account to hold the shares for long time period.
No. You can go with a demat account only if you don’t want to trade in stocks.
For example If you want to buy government bonds only, you don’t need a trading account but you need a demat account to hold your investments electronically.
Secondly, if you want to buy an IPO and hold it, then also you don’t need to have a trading account but only a demat account.
But when you will have to sell those IPOs, you will need a trading account.
That means its better to open both demat and trading account together as they are highly interdependent.
#2. What is Dematerialization and Rematerialization in Demat account?
Dematerialization is converting your physical documents into digital format. For example, if you have old shares in the form of papers, you can convert them into digital forms through your broker. That’s called the Dematerialization of stocks.
On the contrary, you can also convert your digital shares into paper form by paying the required fee to your broker. This is called Rematerialization.
#3. Is demat account and trading account same?
No. demat account is for storing stocks or similar assets digitally whereas trading account is for buying or selling the stocks.