So, you know which stocks to invest in but need to open a demat account and trading account? Or are you already investing in the stock market and have these two accounts but don’t know the difference between them? Either way, here’s what you need to know.
What is a demat account?
When you invest in most securities, such as stocks, government securities, mutual funds, Exchange Traded Funds (ETFs), etc., you get the ownership of the security and it is transferred in an electronic or dematerialised form to your demat account. So, your demat account essentially serves as a store for the securities you buy.
It acts as a safe and convenient way of holding your investments and does away with the risks that come with owning physical certificates such as theft, delay, fake securities, etc. Your demat account also helps with the immediate transfer of securities and does away with excessive paperwork and costs of transfer.
What is a trading account?
A trading account allows you to participate in the stock market. When you place orders such as to buy or sell stocks, you do so through your trading account. When you open a trading account, you get a unique trading ID that allows you to carry out transactions. You can access multiple stock exchanges through your trading account such as the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), and the Multi Commodity Exchange (MCX).
Your trading account is linked with your bank account and your demat account. For instance, when you want to buy stocks, you place the order through your trading account and the money gets debited from your bank account while the stocks get transferred to your demat account once the transaction is carried out.
Demat account vs trading account
The difference between these two accounts can be narrowed down to their function. The trading account facilitates you to buy and sell securities and carry out transactions. The demat account, on the other hand, exists to store the securities you buy through the trading account electronically to provide the benefits of safety and ease. So, the trading account allows you to transact, while the demat account allows you to take delivery of your investments. Both serve an integral function and need to work together for you to participate in the market.
You can open both your demat account and trading account online. There is no bar in the eligibility criteria for opening either of the two accounts. Indian residents and non-residents can open a demat account and a trading account and so can minors, partnership firms, etc. In case of a minor, the accounts will have to be operated by their legal guardian until they come of age.
For both demat and trading accounts, you can have more than one account. The only thing to note is that if you want to open multiple demat accounts, each has to be with a different Depositary Participant (DP). Similarly, for multiple trading accounts, each has to be with a different broker. Typically, an investor may opt for multiple demat accounts because it allows them to segregate their short-term and long-term investments. As for multiple trading accounts, it allows investors to optimise the benefits and features offered by different brokers.