Online share trading requires a Demat account, a trading account, and a bank account. These are the three accounts that create a digital framework to invest in the stock market. Here you can check the working system of each account and elaborate on the features. Here are the definitions of Demat and trading accounts along with the differences between the two.
Demat Account
A Demat account is an account that holds financial securities in an electronic or digital format. Its working system is very similar to a bank account. Whenever an investor purchases a security, it gets reflected in the Demat account. Whenever a sale of security takes place, it gets debited from the Demat account. It allows you to monitor your securities conveniently from anywhere. You can open a Demat account even if you do not own any shares. To keep a Demat account, you do not have to own any shares. After placing your every trade, securities are settled in your Demat account. Most depository participants (DP) do not charge a fee to open a Demat account.
Trading Account
A trading account is a platform to buy and sell financial securities in the stock market. Every trade you place to buy or sell a security is executed through your trading account. It is mainly a day trader’s account because they place trades frequently. You can open a trading account with a SEBI registered stockbroker. Most brokers offer different brokerage plans for different types of traders. You can choose a brokerage plan as per the frequency of trades you place. Investors who are going to stay invested in their funds can go for a basic brokerage plan.
Savings Account
Bank savings account is also required to invest in the stock market. Your trades are funded by your savings account. Your savings account is linked to your trading account and funds from your savings account are used to buy securities. Your trading account is pre-funded through your savings account.
Thus, all three accounts work together and it is mandatory to have all three accounts to invest in the stock market.
Difference between Demat and trading account
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Purpose-
We use a Trading account to buy or sell financial securities and use a Demat account to store your financial securities digitally. A trading account reflects the flow of transactions whereas a Demat account reflects the securities.
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Functionality –
You do not need to hold your securities in physical format With a Demat account. On the other hand, a trading account allows you to place trades online. You do not need to be present at the stock exchange to make a trade. Both have different functionality for convenient investing in the stock market.
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Maintenance Cost-
A Demat account involves maintenance cost for rending backend services whereas a trading account doesn’t involve such charges or cost.
- The trading account records transactions over a period of time like monthly, quarterly or yearly. A Demat account that holds your wealth in the form of financial securities is measured at a period in time, generally on 31st March of a financial year).
The Bottom Line
You can open a three-in-one account with a bank registered as a stockbroker. Or you can open a two-in-one account with a registered stockbroker and link them with your existing savings account in a bank. There are many stockbrokers who offer free Demat account and the best brokerage plans where you can save up to 99% brokerage on delivery trades.
