New investors in the stock market often think that a demat account and a trading account are the same. However, there are significant differences between the two. Let's have a look at the the major difference between the demat and trading account in India. A quick comparison: Demat vs Trading account.
What is a Demat Account?
A demat account is similar to a bank account and comprises the shares that belong to you. The major difference between a bank account and a demat account is that a bank account consists of the money that belongs to you, whereas the demat account has your shares.
In other words, it acts a storehouse of the shares that you own. In addition, all the shares and securities are in an electronic form within a demat account. However, if you want to trade your shares in the stock market, you need to have a trading account.
What is a Trading Account?
A trading account is used to trade the shares in the stock market and record your trading transactions. A trading account becomes important when you plan to buy or sell shares present in your demat account. That is, just by having a demat account, you cannot make financial transactions in the share market.
To make it simple, you cannot buy or sell the shares directly from your demat account. In fact, a trading account makes share trading all the more simple because it is useful in verifying the market price, trade process, and other details electronically, which means that you do not have to manually trade for the shares in the stock market.
Cost Differences in Demat and Trading Accounts
Maintaining a trading account does not have much cost implications. However, statutory charges, such as GST, turnover tax, stamp duty, and exchange charges along with brokerage charges come into picture when making financial operations with your trading account.
In contrast, even an inactive demat account has cost requirements in the form of annual maintenance charge (AMC) and fixed charges for making debits during the selling of shares from the demat account.
However, there are no costs involved for opening a demat account and for share credits made into it. Many stock brokers offer a free demat account opening. The other charges that are levied for a demat account are for rejections of delivery instruction slip (DIS) and demat request form (DRS).
Role of Demat and Trading Accounts in Share Trade
Both the demat and trading accounts have a vital role in share trade, which encompasses the buying and selling of shares.
Buying the Shares: The first step in buying shares of a company using your trading account is the funding of the trading account from your savings account through NEFT, RTGS, or any other payment gateway. On successful funding of the trading account, a corresponding debit reflects in your savings account and at the same time shares get credited into your demat account.
Selling the Shares: When you sell your shares via your trading account, the shares intended for sale get debited from your demat account and the amount obtained from the sale gets credited into your savings account.
Therefore, it is more convenient to have both trading and demat accounts for share trading.
Hope the difference between demat and trading account is more clear now. Did I miss any important point here? Do let me know, let's add up to make my post further interesting.