Demat Account vs Trading Account

Between the Demat account vs trading account debate, it’s important to know that there’s one key difference between the two. A trading account is utilized to purchase or sell shares on the stock market. On the other side, a Demat account is utilized for storing securities in a digital form.

However, these are not the only difference between these two accounts. Let’s move ahead & understand what these two accounts are & also know various other differences between these two.

What is a Demat Account?

• A Demat account is a particular kind of account used in India to keep shares and securities electronically rather than more conventionally physical certificates. Dematerialization, sometimes known as "Demat," is the process of turning actual shares into digital ones.
• Without having to physically deliver or store share certificates, investors can purchase and sell shares and other assets using a Demat account in an effortless and secure manner. Additionally, it removes the possibility of physical certificates being stolen or lost.
• An individual has to contact a depository participant (DP), which might be a bank, broker, or monetary institution that has a registration with the depository, in order to set up a Demat account in India. The investor may start investing in the stock market after the account has been opened by following the instructions and forms provided by the depository participant.

Overall, a Demat account is a crucial component of the stock market infrastructure in India, and it provides a convenient and secure way for investors to hold and trade shares and securities.

What is a Trading Account?

• An investor can utilize a trading account in India to purchase and sell securities including mutual funds, stocks, and bonds on the stock market. A stockbroker or brokerage business that is accredited by the Securities and Exchange Board of India may open a trading account on your behalf. (SEBI).
• Investors must move money from their banking account to their trade account in order to make transactions on the stock market because a trading account and a bank account are linked. With their trading account, investors can submit orders to purchase or sell shares, and the stock exchange will carry out the transactions.
• Investors can access a variety of trading platforms and tools through trading account app, which can assist them in making well-informed investing selections. These resources may contain research papers, charts that offer market technical analysis, and real-time market data.
• Trading accounts can be used for more than just buying and selling assets. They can be used to evaluate portfolio performance, keep an eye on market trends, and manage risk using stop-loss orders along with additional risk management tools.

In conclusion, a trading account is a crucial instrument for investors that want to trade on the Indian stock market. It offers a simple and secure way for investors to manage their investments and purchase and sell stocks. 

Now let’s compare both of these accounts and find the difference between the two.

Difference between Demat Account & Trading Account

Purpose of the account

A Demat account is designed to hold shares, bonds, mutual funds, gold bonds, and other securities in electronic form. Prior to 1996, shareholders held shares in the form of physical certificates. Demat is like a bank account for shares and other securities.

A trading account is the engine for capital market transactions and can be used for buying and selling shares and ETFs on the stock exchange. When you buy shares in your trading account, the shares eventually get credited to the Demat account.

Account Opening Process

A Demat account can be opened with a depository participant (DP) affiliated with the NSDL or CDSL. Most Indian brokers are also DPs and their DP registration will be prominently displayed in their offices and letterheads. It is good to keep DP and trading accounts with the same broker.

A trading account can be opened with a SEBI-registered broker. You can either open a trading account at a branch or through any of the registered sub-brokers of the main broker. Brokers open trading cum Demat (TCD) accounts through a common KYC process flow.

Regulation

A Demat account is opened with a DP. These DPs, being market intermediaries, are regulated by SEBI. Depository participants have first-level regulation by NSDL, CDSL, and stock exchanges with second and final-level regulation by SEBI.

A trading account is opened with a broker. Again, being a market intermediary, they are regulated by SEBI. Brokers do the compliance and RMS and are also subject to similar multiple levels of regulation.

Proof of title or transaction

When you open a Demat account, there is Demat holding statement and a Demat transaction statement that is proof enough. Your Demat account is also available to access online so that you can download it.

When you buy or sell shares, the contract note is the final proof of the transaction and the granular details. If you have an online account, details are also available on the net platform.

Intraday trading

Intraday trading does not impact Demat accounts, since the net position at the end of the day is nil and so there is no debit or credit to the Demat account. But a Demat account is required even if you only plan intraday trading.

Intraday trading is executed both ways in the trading account and closed. If the trader does not close the intraday position, the broker will close it before the close of trading on the same day.

Placing orders and trades

To debit shares to your Demat account post a sale, you must issue a debit instruction slip to your DP / broker to execute. You can also instruct online with POA. Credit instructions are generic and blanket in nature.

Trade orders can be placed either in person, by phone, or through your online trading account. Take confirmation of trade from your broker. You can also give instructions via your mobile application

While buying and selling shares

When you buy shares the Demat account gets credited by these shares on T+2 day and when you sell shares the Demat account gets debited on T+1 day and the cash gets credited to the bank on T+2 days.

A trading account is an execution platform. When you buy/sell shares it shows up in your trade book and then impacts your Demat account credit/debit with a time lag.

Multiple accounts

There is no restriction on the number of Demat accounts you can have. However, it is better not to keep your Demat accounts inactive for too long and suggest closing such accounts not in use. Restrict to at most 2 Demat accounts, not more than that.

You can have trading accounts with as many brokers as you prefer. For simplicity, it is better to stick to 1 or 2 brokers so that your transactions can be easily tracked and capital gains computed. You can only have one trading a/c with 1 broker.

Documents needed for account opening

A Demat account requires you to produce basic documents for proof of identity and proof of residence but remember that a PAN card is a must. It is common with trading accounts for TCD accounts.

A trading account also requires proof of identity and residence. However, for F&O accounts proof of net worth and risk capacity documents are also asked for by the broker.

 Dealing with derivatives transactions (F&O)

A Demat account is not impacted by derivatives trades, since these are contracts and not assets. Demat accounts only store assets. The exception is if you offer shares as a security margin for trading in the futures and options market.

The futures and options trades only reside in the trading a/c. Till the expiry of the contract or till the time the contract is closed out or reversed, they remain in the trading account only, since these are contracts.

 Factors to Consider for account opening

For a Demat account, you need to consider proximity to the DP and the track record. A big institutional name with pedigree and skin in the game is always preferred. Look for tech-savvy names leveraging technology well to offer services.

For an online trading account, it is the service quality, the speed of the app or platform that will matter. However, also look for the quality of research ideas given and the nature of advice and product recommendations.

 Switching accounts

Switching a Demat account is simple. Open a new Demat account and then do an off-market transfer of shares to the new Demat account. Give a letter for closure of the old Demat account to close the loop with the old DP.

You can open a new trading account with a broker and close your old account. However, ensure that all pay outs are in your bank account and the share deliveries have come. Pay up any outstanding dues.

• The Dematerialized accounts, or Demat accounts as they are more often called, are located where the shares that are sold or purchased are constantly kept. 
• The abbreviation "Demat" for "Dematerialized" refers to the practice of storing any securities acquired through exchanges in electronic formats. 
• Demat accounts exist because people can no longer possess physical share certificates. 
• The Demat account & the bank's account are connected through the trading account. 
• Using a trading account, shares kept in the Demat account are bought and sold on the stock market. 
• The trading account could be comparable to the current account while conducting share purchases, and the Demat account can be compared to a savings account or a facility for storing any securities that are "saved" or stored. 
• Simply put, a trading account is used for the transactions that traders and investors engage in with respect to their securities. 
• The buying and selling of shares is a part of transactions. If you are dealing in securities that need storage or holding, such as stocks, a trading account is meaningless without a Demat account.