Difference Between Trading and Demat Account

Edited by Diffzy | Updated on: July 04, 2023

       

Difference Between Trading and Demat Account

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Introduction

The share market attracts several people for investing. The primary motive of every investor is to earn a huge profit. A Demat account and a trading account are two of the most crucial prerequisites for trading on the stock market. A demat account is an account where you can hold your shares or other types of assets in a dematerialized form. An account that allows you to transact is a trading account.  An investor need to have both Demat as well as a trading account to trade in the stock market.

Trading vs Demat Account

The key distinction is that a Demat account keeps track of the holdings of shares and other investments at a specific point in time, whereas a Trading account records capital market transactions over time. With the help of debit from a Demat account and market sales, securities can be bought and sold using a trading account. The ability to store financial items electronically is provided by a Demat account, however.  To open a trading account, a bank account is required. But having a bank account is not a requirement to open a Demat account. Even while a bank account is not required to open a Demat account, it should be noted that some brokerage firms do such to conduct trading activities. The Demat account enables the ability to automatically receive financial advantages when an organization or a firm issues dividends, returns, or interests only by having a Demat account. While such benefits cannot be accomplished just by having a trading account.

Difference Between Trading And Demat Account In Tabular Form

Parameters of ComparisonDemat  AccountTrading  Account
NatureThe functioning of a Demat account is analogous to that of a savings account. Investors can maintain financial assets in a dematerialized or digital format by using demat accounts.A trading account, on the contrary hand, functions similarly to a standard bank account in that the account holder utilizes it to conduct purchases and sales.
ObjectiveThe basic function of a Demat account is to ensure the security of an investor's shares.The basic goal of the trading account is to acquire and sell equities.
FacilitiesInstead of physically storing their shares, it enables investors to do it online. The current assets of the holder, including stocks or shares, are tracked by it.Users can trade and have a presence in the stock market as a result of it.
Unique numberA Demat account has a unique Demat number that is held by an account holder.Similarly, the trading account holder has a unique trading account number.
Opening partyThe opening party is a depository participant.The opening party is a stockbroker.

What is a Trading Account?

To buy securities and keep track of trades, traders use online investment accounts known as trading accounts. It enables the purchase and sale of securities on the open market, including stock, items of commerce, foreign exchange, etc. by investors.

Trading accounts are governed by the Financial Industry Regulatory Authority (FINRA), where account actions are carried out over one day during a weekday. This means that any deals entered into the trading account will be processed and settled on the same day. To guarantee efficiency and openness in the financial markets, this rule was put in place. Additionally, it assists in preventing any potential hazards or manipulations that can result from nocturnal trading operations.

Rule compliance is necessary for pattern day traders under FINRA regulations.

  • Traders who carry out at least four deals during a five-day workweek.
  • Traders whose trading actions account for more than 6% of the total trading activity for the week

Margin Requirements for Trading Accounts

These requirements can be categorized into two parts which are as follows:

Maintenance Requirement

one is required to keep their margin account's equity at least 25% full at all times under FINRA Rule 4210. The majority of brokerage companies retain margin requirements that are equal to or frequently higher than those imposed by authorities.

Day Trading Buying Power

Day traders are permitted to buy a maximum of four times the minimum amounts required by FINRA. Broker-dealers will issue a margin call to traders who don't satisfy these standards, forcing them to either add more money to their accounts or sell some of the securities in their portfolios.

Before creating a trading account, a trader must satisfy certain margin specifications.

Opening of a Trading Account

Further, we will discuss the steps which are required for opening a trading account. It's simple and trouble-free to open a trading account. Keep the necessary paperwork close at hand to guarantee a seamless transaction.

The steps are as follows:

Selection Of A Brokerage Firm

The initial step is to select a brokerage firm that will provide the facility of opening a trading account. The firm should be selected after conducting thorough research about the company. Before selecting a brokerage, the different fees they charge, the user interface of the trading platform, and additional services should be considered.

Submitting The Opening Form

One must complete an account opening form and a Know Your Customer (KYC) form once one has decided on a broker. customer will be helped through the procedure by a brokerage firm representative.  Normally, they are known as participants.

Submission Of Identity Proof

One must provide identity verification, proof of residency, and occasionally income proof during this step. Along with several additional documents, you can use a photocopy of your passport or Aadhar card as identification. You can also submit a copy of your PAN card or Aadhar card as proof of residency. Opening a trading account requires a PAN card.

Verification Process

The customer has to go through a verification process after filling up the opening form. The verification step is the mandatory and most important step while opening any account. After the verification process is complete, the trading account is typically activated in 3–4 days.

Acquiring A Trading Account Number

After receiving the details of the account the customer is provided with a unique identification number which is known as the trading account number. The trading account number is used while trading in securities in the stock market.

What is a Demat Account?

The term “Demat” originated from the term “dematerialization”. Dematerialization means converting the shares to an electronic format or a digital format.

A Demat account is just an account that enables customers to store their shares electronically. The tangible shares are dematerialized using a Demat account, which transforms the shares into a digital form. Customers will receive an account number for a Demat account when they open a Demat account so that they can digitally settle their trades.

Dematerialization

The facility of dematerialization is provided by the depositary participants. A Depository Participant (DP) must open a Demat account for an investor who wishes to conduct online trading. Dematerialization aims to make keeping physical share certificates unnecessary for investors and to make ownership easier to track and monitor.

Demat made it possible for the Indian stock market to become more digital and forced SEBI to practice improved governance. The issuance of share certificates used to be a time-consuming and laborious operation, but Demat has helped modernize it by accelerating the procedure and preserving the credentials in digital form. Additionally, by storing stocks in electronic format, the Demat account decreased the hazards of storage, theft, damage, and malpractices. NSE initially presented it in 1996. Investors had to wait many days for their accounts to be activated because the initial account opening procedure was manual. One can now open a Demat account online in just less than five minutes.

Opening of a Demat Account

Anyone who trades in financial instruments must have a demat account, according to the Instruments Exchange Board of India (SEBI). Opening a Demat account is a requirement when it comes to stock market investing.

Following are the steps which need to be followed for opening a demat account.

Selection Of A Depositary Participant

In India, two depositaries provide the facility of the depositary. These are CDSL and NSDL. One must get into contact with a depositary participant who will perform the activities on behalf of the investors. Banks and other financial institutions can also act as a depositary in many cases.

Fulfilling Application Form

one must fill up an application form and submit it with the required paperwork after selecting a DP. Such documents as a passport, driver's license, voter ID, and utility bills serve as evidence of both identification and address. One might also have to present evidence of their income, such as current paychecks or tax returns, in addition to these papers. Since inadequate or missing documentation could cause a delay in your application's processing, it is crucial to carefully examine the application form and make sure all necessary documentation is included.

Verification of Documents

After the fulfillment of all the necessary documents, their verification is done. The verification process is carried out properly in case of any deviation. The DP will activate your Demat Account as soon as your account has been approved and the documents have been verified.

The Signing Of An Agreement With The DP

An agreement detailing the specifics of the investor's rights and obligations as an investor and DP is signed with the DP. Keep in mind that investors have a legal right to a copy of the contract and a breakdown of connected costs for their records.

Demat Number

The account will be opened by the DP, who will also issue the investor a Beneficial Owner Identification Number (BOIN), also known as a Demat account number. After proper verification, a demat number is given to an investor by the depositary participant. Every investor has their unique number given by the depositary.

Charges For Opening A Demat Account

Account opening charges: Typically a one-time fee, this cost varies based on the bank or broker and might be anywhere between 200 and 500 rupees.

Annual maintenance fees: The costs associated with keeping your Demat Account active. This fee is paid yearly and might be between 200 and 500 rupees.

Depository fees: The costs you incur for using the depository's services (such as NSDL or CDSL). This price is typically flat and might be between ₹10 to ₹ 20.

Various banks and brokers may have different fees. As a result, it is crucial to compare the fees before opening a Demat Account. Over time, the fees might alter.

Difference Between Trading Account And Demat Account In Points

  • Like a savings account, a Demat account operates similarly. A trading account, on the contrary hand, works a bit like a current bank account and stores money the same way a savings account does.
  • In contrast to a trading account, which is used to purchase and sell shares on the stock market, a demat account is used to store equities in an electronic format.
  • A Demat account records the investor's wealth effect at a particular point in time, but a Trading account represents the flow of transactions over some time.
  • A bank account is a must for opening a trading account. But the requirement of a bank account is not a prerequisite for opening a Demat account.
  • Investors who have Trading accounts have access to all major stock exchanges. While a Demat account only gives you a way to hold those securities, it does not provide you access to them.

Conclusion

In light of everything that has been discussed above it can be concluded that from the point of view of an investor, both the accounts hold equal weightage. If an investor wants to keep his securities or other financial instruments or certificates in electronic form, then a Demat account can do the work. There will be no need for a trading account. But if the investor wants to deal in equities then he should open a trading account along with a bank account to do the necessary dealings.

Investors must have both of these accounts to trade in equities. Selecting a broker service that meets one's investment needs is crucial. So, the decision should be taken very carefully.


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"Difference Between Trading and Demat Account." Diffzy.com, 2024. Sun. 25 Feb. 2024. <https://www.diffzy.com/article/difference-between-trading-and-demat-account>.



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