A common question I get from almost all new entrants to stock market is what is the difference between demat account and trading account which I will try to answer in this post.
I am sure, even if you are in the stock market for sometime now, you will have this confusion. Many people believe that both of them are same and there is no difference.
Why two different accounts are required? Which account should you open?
The answer lies in the purpose and role of demat and trading account.
I will try to answer all these questions in this post. But first let’s see what is a demat account and what is a trading account.
Suggested Read : 9 Best Demat and Trading Account in India
What is a Demat account? – History
Before 1999, all the shares of companies used to be physical certificate form. When you purchase the shares, you were given paper certificate with your name, company name and number of shares you hold.
Now it was your responsibility to take care of these forms. Obviously it created lot of issues with respect of handling them.
Like, it may get damaged in natural mishaps such as floods, earthquake etc.
Also, few cases of theft, lost in transit etc also reported.
To do away with problems of materialized format of the shares, share market regulator SEBI introduced dematerialized concept.
In this format, all the shares are held in dematerialized form and the account to hold shares in dematerialized form is known as Demat account. It also mandated that all the shares held currently in physical form has to be mandatorily be converted to dematerialized form before selling them.
But I know few people still holding shares copies which they inherited from their parents but dont know how to convert them to demat form. I will write a separate article on that topic.
What is a Trading account?
Now comes the interesting question, if demat account is for holding the shares in electronic forms, then what is a trading account and why it is required.
Previously to sell or buy the shares in physical form, you or your stock broker need to be physically present in the stock exchange like NSE or BSE. The broker used to shout at which price his client want to buy or sell the shares.
Now in today’s world this interface is provided by a Trading account.
Now it is easy to place the order to buy or sell through the web or mobile app provided by the broker. Interestingly, technology has made it possible that even the broker need not be present at stock exchange.
I am sure by now you might have understood why a trading account is required.
Basically it provides the interface to transact the shares and funds.
Difference Between Demat Account And Trading account
Now that we hae understood the functions of both accounts, it is very easy to understand the disparity between the demat account and trading account.
Suppose you are a Futures and Options trader or an intraday trader who is not interested in buying the shares, but only want to make money by trading, which account do you think is necessary for you?.
Offcourse a trading account. Demat account does need not be opened in this case as you are not going to hold your shares as investment.
Now suppose your friend is a long term investors who purchases shares and dont trade frequently. Or another friend who just applies for IPO to get allotment of shares. Which account is required in this case?.
Only demat account is sufficient for the above case.
Demat Account Vs Trading account – Role Difference
Demat account is just a repository. It helps to hold the shares once you purchase them. It does not help you to transact them on share market. For that trading account is required. Demat account is not linked with your bank account.
Trading account is linked with your bank account. All the funds transaction happens through trading account. So to buy shares, first the funds has to be transferred to trading account from your bank account.
When you buy the shares, funds get debited from your trading account.
The shares thus purchased gets credited to your demat account.
Similarly, when you sell the shares, the shares get debited from your demat account and the corresponding amount gets credited to your trading account.
Then you can withdraw the funds to your bank account from trading account.
So all in all, demat account holds the shares and trading account hold the funds.
I have tried to capture the comparison between trading and demat account in the below table.
| Difference Between Demat and Trading Account | |
|---|---|
| Demat Account is used to hold shares in electronic form | Trading account is link between Demat account and Bank account |
| Demat account can be use to hold multiple financial instruments such as shares, bonds, mutual funds and ETFs | Trading account only helps in transfer of funds, it is not useful for holding any securities |
| Main purpose of demat account is to help the investors to safely hold their investments | Main purpose of a trading account is to help the customers to seamless transfer of funds. |
| Demat only account can be used to apply for IPO, conversion of physical forms to electronic form. | Trading account only can be used to trade in Future and Options. |
| If you want to know your wealth in stock market at a given point of time, you should refer to demat account. | To know about the transaction you carried out within a date range, you should refer trading account |
Can I Have Only Demat Account Without Trading account?
Yes it is possible to open only demat account without a trading account. But it has very less practical advantage. For the purpose such as converting the physical shares to demat form, applying for IPOs then only demat account is good enough. But the day you decide to sell them, you need to have a trading account.
You can approach the depository like NSDL and CDSL and open the demat account. Thus you can open a demat account without a stock broker. You can even transfer the shares to another person without a broker and receive the funds.
Suggested Read : How to transfer shares from one demat account to another
But in this case, there is no guarantee that the person you interacting will adhere to his promise. This is where the stock broker comes in. He will make sure that you get the money and other party gets the shares. He will take his commission for his services.
Can I Have Only Trading Account Without Demat account?
Yes, you can have only trading account without demat account. Some broker allow customers to open only trading account for those who are interested only in trading. Even I initially opened trading only account with Zerodha then later opened the demat account.
Can I have a multiple trading account attached to a single demat account?
Yes, you can have a demat account with a broker and also have a trading account from another broker and attach the same with your demat account.
Is Intraday Trading Possible Without a Demat Account?
Yes, only trading account is sufficient for intraday trading. However, many broker do not allow to carry on intraday trading as if you do not close your open your positions by end of the day, it can go to delivery. So a demat account is necessary to settle the shares.
Charges Related To Demat And Trading Account
As far as charges are concerned, all the charges are related demat account. Few brokers charge trading account opening charges. But demat account comes with many charges like Annual Maintenance Charges (AMC), off market transfer charges, DP charges etc. Some brokers are also offer free demat account by waiving off account opening charges and AMC.
Brokerage charges are the main expenses incurred while operating the demat account. Certain brokers charge in terms of percentage of the total value you invest. This makes them very expensive and the total return you make in long term is affected.
Myself use broker named as Zerodha who is the biggest stock broker in India and hence the trust factor.
But the main point is, the brokerage charges is zero for all the investment using the demat account. For trading such as intraday trading and F&O, they charge Rs20/trade irrespective of order value. This results in enormous saving and adds to profit statement.
You can open the account with them using the link below.
Following documents are required to open demat and trading account:
- Pan Card
- Adhaar Card
- Cancelled cheque or one month bank statement
- Photo of your Signature on while paper
Demat and Trading Account Difference – Conclusion
Hope I am able clarify the key differences between a demat account and a trading account in India. Though these accounts are interdependent, it is possible to open only demat account or only a trading account.
That being said, for smooth operation and convenience, it is suggested that to have both the accounts and with a same broker.
Many brokers nowadays have stopped offering only demat or trading account. For example, zerodha have discontinued trading only account.
Kindly share this article and if you still have any doubts, let me know through comments.
You May Also Like To Read :
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- Life Time Free Demat And Trading Account In India
- How to Transfer Shares From One Demat to Another Demat Account
- Best Banks to open 3 in 1 demat Accounts
- 7 Advantages of Demat accounts
- Key Factors to Consider Before Opening a Demat Account
- Top Demat Account In India For Non Resident Indians – NRIs
- Is it legal to open multiple demat accounts in India?