When you begin your investment journey in the stock market, two key accounts come into play: the Demat account and the trading account. While they are often confused with each other, they serve distinct purposes. Understanding the difference between these accounts is essential for anyone looking to invest in stocks, mutual funds, or engage in options trading.
In this blog, we will clarify the differences between a Demat and a trading account, explore their roles in the stock market, and discuss how they complement each other in your investment journey.
What Is a Demat Account?
A Demat account (short for Dematerialized account) is an electronic account used to store securities such as stocks, bonds, and mutual funds. Before the introduction of Demat accounts, these securities were physically issued as certificates. With a Demat account, all your holdings are stored digitally, reducing the risk of loss, theft, or damage.
Key Features of a Demat Account:
Stores securities electronically: No more paperwork! You can easily manage your portfolio of shares and bonds online.
Required for holding shares: Any equity investor who buys shares on stock exchanges like the NSE or BSE must have a Demat account.
Ideal for long-term investors: Whether you are holding stocks, mutual funds, or bonds, a Demat account safely keeps them in digital form until you’re ready to sell.
What is a Trading Account?
A trading account acts as an intermediary between your bank and Demat accounts. A trading account, in essence, acts as the best trading platform for buying and selling securities.. When you place an order to buy or sell a stock, it is processed through your trading account.
Trading Account Meaning: In simple terms, it is an account that facilitates transactions in the stock market. Whether you are involved in intraday trading, delivery trading, or option trading, all activities take place through your trading account.
Key Features of a Trading Account
Facilitates transactions: It allows you to buy or sell shares, which are then credited or debited from your Demat account.
Supports different types of trading: From intraday trading (buying and selling stocks on the same day) to delivery trading (holding shares for the long term), a trading account enables all types of stock market activities.
Linked to your bank account: A trading account is usually linked to your savings account for funds transfer.
Demat and Trading Account: Are They the Same?
A common misconception is that a Demat and trading account are the same, but this is not true. Both are required for different aspects of stock market operations. Here’s a simplified breakdown:
A Demat account holds your securities (like stocks, bonds, and mutual funds) in electronic form.
A trading account is used to buy and sell these securities in the stock market.
Think of it like this: your Demat account is a digital locker for holding shares, while your trading account is the transaction portal that helps you purchase and sell shares.
Demat Account vs Trading Account
To further clarify the differences between these two accounts, let’s dive into the comparison:
| Feature | Demat Account | Trading Account |
| Purpose | Holds shares, bonds, and other securities electronically | Facilitates buying and selling of securities |
| Primary Function | Storage of shares | Transaction of shares |
| Linkage | Linked to your trading account | Linked to both Demat and bank accounts |
| Required for | Holding stocks, bonds, and mutual funds | Trading in stocks, futures, options, etc. |
| Transactions | No direct transactions; only stores securities | Used for executing buy/sell transactions in the market |
What Is the Difference Between COMRIS and Demat Accounts?
A COMRIS account is a type of Demat account specifically for NRIs (Non-Resident Indians) who wish to invest in the Indian stock market. While a regular Demat account is for resident Indians, the COMRIS account is designed to accommodate the special requirements of NRIs, including compliance with the Foreign Exchange Management Act (FEMA).
Do You Need a Trading Account for Share Trading?
Yes, if you’re planning to buy or sell shares, you’ll need both a Demat account and a trading account. The trading account is required to place buy/sell orders, while the Demat account is where the shares will be stored after purchase or from where they will be debited upon selling.
For Mutual Funds: If you’re only investing in mutual funds, a Demat account is optional. Mutual fund units can be held in physical form or through other platforms like AMC websites. However, having a Demat account helps consolidate all your investments (stocks, bonds, and mutual funds) in one place.
Which Type of Account Do You Need to Open for Trading?
To start trading in the stock market, you need to open two accounts:
A Demat Account: This is for holding your purchased securities in electronic form.
A Trading Account: This is for executing buy/sell transactions.
Most brokerage firms offer online Demat account opening services along with a trading account, making the process smooth and quick. Today, you can open a Demat and trading account simultaneously using a Demat App offered by various stock brokers.
How to Do Trading in a Demat Account?
Trading itself doesn’t happen in the Demat account but through your trading account. The Demat account serves as a repository for the shares once you’ve bought them through the trading account.
Here’s how trading works:
- Place a buy order in your trading account using your broker’s platform (app or website).
- Funds are debited from your linked bank account and the trade is executed.
- The purchased shares are then credited to your Demat account.
Similarly, when you sell shares, they are debited from your Demat account and sold through your trading account.
Different Types of Trading Accounts
There are a few types of trading accounts depending on your investment needs and the services offered by your broker:
Equity Trading Account: Used for trading in stocks and other equity instruments.
Commodity Trading Account: Specially designed for trading in commodities like gold, silver, oil, etc.
Derivatives Trading Account: Used for trading in futures and options.
Currency Trading Account: For trading in foreign exchange (forex) markets.
Online Demat Account Opening: A Simple Process
Opening an online Demat account is now a streamlined process. Most stock brokers allow you to open free Demat account online digitally through their apps or websites. Here’s how to get started:
- Visit the website or app of the broker.
- Fill out the account opening form.
- Upload necessary documents like ID proof, address proof, and a photograph.
- Complete the e-KYC process (Know Your Customer).
- Once verified, your Demat and trading accounts will be opened, and you’re ready to start investing!
Conclusion
While a Demat account stores your securities, a trading account enables you to transact in the stock market. Both are indispensable for anyone looking to invest in shares or participate in the stock market. Whether you’re a beginner or an experienced investor, understanding the difference between these accounts is crucial for making informed financial decisions. If you’re planning to start investing, you can open a free Demat account with HDFC Sky and make your journey hassle-free.