Most of the newbies who enter the stock market world might easily get confused about whether to open a Demat account or to open a trading account. The majority of the people may end up opening an account which they do not need, which can surely waste their time and money.
To explain further, one can consider that the purpose and role of both the accounts are different in nature and functionality.
Therefore in this article, we can simply take the whole understanding part. So, there is ample clarity on whether to open a Demat account or a trading account.
The Key Differences between Trading and Demat Account:
- A trading account is where you can buy and sell orders. It is a mode to do the transaction or transfer funds from the bank to your stock account.
- A Demat account or ‘ Dematerialized account’ is similar to having a bank account. The only difference is that in a bank, you store money, and in a Demat account, your stocks are kept.
- There are two ways to start with your accounts. The first is easy online account opening, and the second is through the traditional method of submitting the relevant forms.
Understanding the Demat Account
A Demat account serves as a facility where stocks you buy are safely deposited and the stocks you sell are properly channeled to the buyer. Please remember that the Demat account is used only for the storage of stocks, not for any transactions (buying or selling).
Having a Demat account helps you to store all kinds of financial instruments, such as bonds, mutual funds, exchange-traded funds, etc. Therefore, if you are in a long race of stock trading / investing, you must consider opening a Demat account.
Understanding the Trading account.
A trading account is a medium to buy and sell shares in the stock market.
When a company lists its share in the market, you can easily buy or sell the shares only after you have a trading account.
Different stockbrokers offer different trading tools to make stock trading easy for their customers.
You can imagine this scenario that each time you wish to transact any shares or securities, it will be through your trading account, and the shares or securities you bought will be kept in your Demat account. And if you wish to sell these financial assets, then they will be debited from your Demat account, and the money will be transferred to your savings bank account.
Many financial firms provide a 3-in-1 account, which is the combination of a savings bank account, Demat account, and a Trading account.
How to open a Demat account?
Opening a Demat account is simple and requires less paperwork. All you need is to approach a good/reputed financial services firm.
Here are the steps for opening a Demat account:-
- Fill the account opening form.
- Submit the required documents i.e. a proof of identity and a proof of address.
- Complete the in-person verification
- Receive an account number/ ID.
You can also opt for an online process where you can add basic details with the scanned copies of documents such as (Aadhaar, PAN, Cancelled Cheque, and your latest bank statement) for opening a Demat account.
How to open a trading account?
With the help of digitalization, opening an online trading account is simple.
- Select a broker or a firm with good brokerage rates and services.
- Fill in the account opening form and complete the KYC details.
- Attach the address proof and ID proof as well.
- Wait for your application verification process.
- Get the details of your trading account.
- Happy trading.
Although opening a trading account doesn’t cost you anything, it does cut brokerage fees on any transaction, whereas in a Demat account, there are Annual Maintenance Fees or charges for your Demat account. Further, when you sell a share, there is a percentage deducted from your Demat account.
There is no restriction over the number of trading and Demat accounts. You can open as many Demat or trading accounts. The core reason for this is because the broker service may or may not be up to the mark for your trading profile.
Trading and Demat accounts are a must for investing in the stock market. Before you start trading, you must be registered with the stock exchange. Whereas, the stockbroker acts as a registered member of the stock exchanges and can trade on your behalf.
Using a trading account, you can instantly buy or sell orders online through any trading platform or phone via your stockbroker.