How Demat And Trading Accounts Work And What Are The Differences In Both?

Trading Account Vs Demat Account

Stock markets are markets where securities are traded. All your stock market transactions involve an interplay between the following accounts:-

  • Bank Account
  • Trading account
  • Dematerialization (Demat) Account

In short, stock market investments are impossible without any of the above accounts.

Your Trading Account and Demat Account are closely related but still have subtle differences. They are used for different purposes and are commonly referred to as ‘2-in-1’ accounts in stock market jargon.

As an investor, you may sometimes wonder if you can have a Demat account without the trading account. Yes, you can have a Demat account sans trading account provided you simply intend to hold your allotted shares and securities in electronic form. But if you want to buy or sell shares you will need a trading account that is linked to your Demat account.

Conversely, if you want to transact only in derivatives, mainly options and futures then a Demat account is not needed. A trading account will suffice.

Now let us discuss the distinguishing features between the two accounts.

Trading Account Vs Demat Account

Here are some insights on Trading Account Vs Demat Account:

Nature of the accounts

A trading account is an account that facilitates the buying and selling of securities with unlimited frequency. In fact, you can trade in securities as frequently as you want within the same trading session.

A trading account captures your trading activities over a period of time. Trading account statements enable you to understand transaction flow in a given time horizon. It is similar to the income or cash flow statements in financial accounting. You can access statements for any period – monthly, quarterly, semi-annually, annually, etc.

A Demat Account, on the other hand, converts your physical share certificates and securities into digital form. It gives you a summary of your current investment status.

In other words, a Demat account captures your stock market position at a single point in time. It is akin to a balance sheet in financial accounting. Usually, Demat account statements are accessed on the last day of the financial year – 31st March of each year.

Also Read: What is a cashback and How does cashback work?

The interface between Trading and Demat account in ‘Buy’ transactions

Let us take an example here. Assume that you wish to buy 100 shares of HUL at Rs 2000 per share, then by 11.00 am of next morning your trading account should have a minimum balance of Rs 2,00,000. If you do not replenish your trading account with the requisite transaction amount, then the transaction will get canceled due to ‘Insufficient Account Balance.’

On a T+2 basis, that is, two days after the transaction date, your Demat account will reflect a credit of 100 shares of HUL for a total amount of Rs 2,00,000.

Please note that in financial markets, T stands for ‘Transaction Date’.

Process Flow:

Demat and Trading Account interface in ‘Sell’ transactions

Let us take an example again. Now assume you wish to sell 100 shares of HUL at a current stock price of Rs 2000 per share. Your Demat account will be debited with 100 shares of HUL on a T+1 basis, and the sale amount of Rs 2,00,000 will be credited to your bank account on T+2 days.

If the Demat account does not have the specified number of shares as stated in the sale instruction, the ‘Sell’ transaction will fail.

Also Read: The process to Be ISO Certified in India

Process Flow:

Account charges

While most of the Demat Account service providers waive the Demat account opening fee for online Demat applications, brokerage firms or service providers will charge a nominal fee for both online and offline trading account applications.

Depending on your subscription plan with the Depository Participant/Brokerage firm, your Annual Maintenance Charges for both the trading account and Demat account will differ.

Moreover, tricing structures vary across brokerage firms. So visit their respective websites to get more details about their subscription plans.

Nowadays, since both trading and Demat accounts can be opened and operated online, transactions are seamless and hassle-free. Understanding the differences between the two will enable you to carry out capital market transactions more effectively.

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