What is the Difference Between Demat and Trading Account?

We normally do not focus on the subtle differences between the trading account and the demat account. Of course, they are linked to each other because that is how shares pass to and from your account. Let us look at some of the key differences between a demat account and trading account.

What is the purpose of the demat account and trading account?

The main purpose of a demat account is to hold shares, bonds, mutual funds in electronic form. Any individual intending to trade shares must have a demat account. Demat replaced physical certificates post 1997. On the other hand, the trading account is for transacting (buying and selling) shares and ETFs on the stock exchange. The logic works like this. When you buy shares through your trading account, the shares get credited to your demat account; which is like a bank account for shares.

How to open a trading account and a demat account?

Remember, demat account resides with one of the 2 central depositories - NSDL and CDSL. But these accounts are managed through depository participants (DPs), which is where a demat account can be opened. Basic documentation required is proof of residence and identity as well as PAN card and cancelled cheque. A trading account can be opened with a SEBI registered broker. You can either open a trading account at a branch or through the registered sub-brokers. It is also possible to open the trading account online through e-authentication. Brokers normally open trading-cum-demat accounts. For F&O trading you also need to submit proof of income and net worth.

Are DP accounts and trading accounts regulated?

Both the demat account and trading account are subject to multi-level regulation. For example, the demat account is opened with a DP. These DPs, being market intermediaries, are regulated by SEBI. So there is first level regulation by NSDL / CDSL and second level regulation by SEBI. In the case of trading accounts also there is dual level regulation. The first level regulation is done by the stock exchanges and the second level by SEBI.

How are transactions and ownership of shares acknowledged?

When you open a demat account, you get a Demat Statement each month. The demat account is also available to access online. That is acceptable proof of your holdings. When you buy or sell shares in your trading account, you get a contract note that acknowledges the transaction. If you have an online account, contract notes are available online.

Can I have only trading account or demat account or must I have both?

If you want to transact, you need a trading account. In case you just want to hold shares (inherited or transferred), then demat account is good enough. Even for IPO applications only demat account is required. However, you need a trading account to sell these shares. If you want to only deal in derivatives (futures and options) demat account is not required.

How does the trading account / demat account relation work?

When you buy shares, the demat account gets credited by these shares and when you sell shares the demat account gets debited for the number of shares. A trading account is an execution platform. When you buy / sell shares it shows up in your trade book and then impacts your demat account credit/debit. Only delivery has an impact on your demat account. Futures, options and intraday trades have nothing to do with demat account.

Is it possible to operate demat account and trading account online?

You can operate the trading account and demat account online using the internet or even through the app on your smart phone. A demat account can be operated online by signing power of attorney (POA) form with your DP and that becomes a lot simpler. A trading account can also be operated entirely online including buying, selling and intraday trading of shares as well as futures & options. It gives a lot more control.

Specific factors to consider in demat account and trading account

For demat account you need to consider track record. A big institutional name is always to be preferred but check service quality. For a trading account check execution skills, online interface and the quality of research offered.  Of late there has been a surge of discount brokers who operate on very low costs and don’t offer any frills. The choice is yours.