When investing in the share market, you need accounts that allow you to carry out transactions and hold the assets you purchase. A Demat account and a trading account serve these two purposes. A Demat account is used to hold shares and other assets electronically, while a trading account allows you to place buy and sell orders. This article explains the differences between a Demat account and a trading account, and how they work together.
A Demat account (short for dematerialised account) is an account used to hold shares and other assets electronically.
You open a Demat account with a Depository Participant (DP), which acts as an intermediary between you and the depository. In India, there are two main depositories for Demat account opening: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
Some key features of a Demat account include:
● Storing assets: Holds your shares, bonds, ETFs and other eligible assets electronically.
● Receiving shares: You receive shares purchased through delivery-based trades.
● Transferring assets: You can transfer eligible assets between Demat accounts.
● Monitoring investments: You can check the assets held in your account and review your transactions.
A Demat account does not directly carry out trades in the stock market. It is primarily used to hold your assets electronically.
A trading account allows you to buy and sell assets through your stockbroker. It acts as your link to the stock market.
You generally log in to your broker's website or trading application to access your trading account.
Some key features of a trading account include:
● Buying assets: You can buy shares and other eligible securities.
● Selling assets: You can sell the securities you hold.
● Monitoring the market: You can track stocks, market movements and your orders.
● Monitoring transactions: You can check orders that have been executed, are pending, cancelled or rejected.
While a trading account helps you carry out transactions, it is not the primary account used to hold your shares electronically. Assets purchased through delivery-based trades are generally credited to your Demat account.
Both accounts play an important role when investing online.
| Basis | Demat Account | Trading Account |
|---|---|---|
| Purpose | Holds assets electronically | Allows you to buy and sell assets |
| Function | Stores your investments | Places and manages orders in the market |
| Operated by | Depository Participant (DP) | Stockbroker |
| Use | Holds shares, bonds, ETFs and other eligible assets | Allows you to trade shares and other eligible market instruments |
| Transactions | Receives and delivers assets | Places buy and sell orders |
| Connection | Linked to a depository | Connected to the stock market through a stockbroker |
Simply put, a trading account is used to carry out transactions, while a Demat account holds the assets you receive through eligible delivery-based purchases.
When purchasing shares through a typical delivery-based trade, both accounts are used.
Suppose you want to purchase 10 shares of a company through an online trading platform.
Buy Order: Log in to your trading account and place an order for 10 shares.
Order Execution: Once your order is matched on the stock exchange, the purchase is executed at the applicable price.
Payment Processed: The transaction goes through the required clearing and settlement process.
Shares Credited: Once the settlement is complete, the purchased shares are credited to your linked Demat account.
Monitor Holdings: You can now check the shares held in your Demat account. You can continue holding them or sell them later through your trading account.
When you decide to sell your shares, you use your trading account to place the sell order. The corresponding shares are debited from your Demat account as part of the settlement process.
The following are the things you should consider before choosing your stockbroker / Depository Participant:
● Opening Charges: Check if there are any opening charges for these accounts.
● Annual Maintenance Charges (AMC): Check for annual recurring charges for your Demat account.
● Brokerage: Know about the charges for buying/selling securities.
● Transaction Charges: Check for the charges for debit transactions and other charges.
● Trading Platform: Check if there are various order types, market information and account related features available.
● Customer support: Review the support channels available for account-related queries and transaction issues.
Investors should also read the terms and conditions and understand the charges before opening an account.
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A Demat account and the trading account have different purposes but work together when investing online. A Demat account is used to store your assets electronically whilst a trading account allows you to place buy/sell orders. Generally, they will work together to allow you to purchase shares using delivery. If you are new to investing, you can explore the 5paisa Alpha app, look into the trading features and account features and how it suits you. Knowing what each account does can help you understand how transactions work in the share market online.
Disclaimer: This content is part of a marketing initiative.