Know why Demat & Trading

Know why Demat & Trading

The stock market offers a number of opportunities for wealth creation. No matter what your profession is, the investment must be imperative for your life. So you need to have proper financial planning as per your needs and goals. Once you have a plan in place, you need trading, Demat, and bank account to start your investments in the stock market.

Demat account is your virtual identity holding your financial assets whereas the Trading account is your transactional identity in the Stock Market for actual buying and selling of stocks.

First, let us understand the actual meaning of both the accounts

Demat Account holds your financial securities in electronic form. If you hold share certificates in physical form, they will be converted to electronic form with a Demat account and give you the ease of accessibility. It is more like a bank account which allows you to store your stocks at a safe location. Just like a bank account records debits and credits, this account records the sale and purchase of shares. The good part is Demat account is not just limited to shares. It can hold your diverse investments like Equity Shares, Bonds, Government Securities, Mutual Funds and Exchange Traded Funds. Once you open the Demat account, you will be given an account number to electronically settle your trades. However, it is not mandatory to have any shares to open a Demat account. In fact, you can even have a zero balance in your account.

Having a Demat account, however, does not get you to trade stocks on a day to day basis. You need to have a Trading Account for the same.

Previously, the stock market was run with traders using hand signals and verbal communication to convey their decisions to sell or buy. However, this was replaced by a trading account when Stock markets were digitized. A trading account can be opened with a registered stock market broker with a unique trading identifier (ID) to perform these transactions online.

The trading account acts as a link between your Demat Account and bank account. When you decide to buy shares the order needs to be placed through the Trading account. The transaction will go to the stock exchange for processing, the price of shares is deducted from your bank account and the corresponding shares will get credited to your Demat account. Similarly sell of stocks undergoes the same process.

To put it simply, a trading account is to buy/sell shares in the stock market whereas the Demat account is a bank account to hold your shares and record buys and sells.

Overall, one of the most important and mandatory requirements for investors is to have a trading account and Demat account. Even a number of newbie traders have a lot of confusion about the Demat and trading accounts.

  • While the Demat Account holds your financial instruments, Trading Account is the tool to trade these financial instruments.
  • A Trading account is like a Current Bank Account used to transact whereas Demat account is like a Savings bank account to hold your financial assets.
  • Demat account is used to hold your securities such as Share Certificates and other documents in electronic format while trading account is used for buying and selling these securities in the stock market.
  • Maintaining a trading account involves no cost while a Demat account entails cost.
  • Trading account captures capital market transactions over a while whereas a Demat account captures your wealth effect at a period in time.
  • Demat account reduces risks of delayed settlement because it's done in a short period, while trading account take time in settlement because it done over a while.
  • A Trading account is used to buy or sell orders in the stock market, while Demat account is used as a bank where shares bought are deposited.
  • Trading account captures your flows, while Demat account holds stocks that you own.
  • As much different in their functions, both these accounts are mandatory to trade in stocks. When buying shares, you put the request through the trading account. The money is debited from your bank account and shares are credited to your Demat account. Likewise, when you sell shares, request is put through a trading account, the shares are debited from Demat account and money from the sale is deposited to your bank account.

If you are still confused between Demat and trading account, Let us understand with an example

Let’s assume you have Rs.100o in your wallet. You go to a shop and tell the seller that you want to buy a T-shirt. You check the price and finalize the transaction. Then, you take the money from your wallet and give it to the seller. In this scenario, you act as the trading account, while the wallet acts as the Demat account.

If you want to trade in the stock market, then it is necessary that you have all the required accounts and tools with you. It is advisable to have a good knowledge of the market volatility before getting into any trade.