Demat Account vs Trading Account: Understanding the Key Differences
Confused between a demat and trading account? Learn how they work together, key differences, and how to start investing the right way.
Stocks are full of opportunities, but you need the right tools to make the most of them. A trading account can be your digital entrance into the world of trading. It enables you to buy, trade, track, and manage your investments in just a few clicks.
What is a Trading Account?
An online trading account allows investors to buy and sell financial assets such as stock, bonds, commodities, and derivatives. Your trading account, on the other hand, links your demat account and bank account to the stock exchange- facilitating smoother transactions.
Trading accounts act as the platform you use to trade stocks, purchase shares, sell holdings, and track your trades.
What is a Demat Account?
A demat account (short for dematerialised account) is an electronic account where your stock is held in a digital form. The method enables investors to hold stocks, bonds, mutual fund units, ETFs and government securities online, without the fear of losing actual stock certificates.
demat account is a digital locker for your investments. A demat account is like a bank account but instead of storing your money it stores your shares and other securities in a safe and readily available electronic format.
How do Demat and trading accounts work together?
If you want to buy shares you will need a trading account and a demat account. When you wish to make a purchase you send an order to the stock market via your trading account. Your order is executed when a seller sells with the same price and order priority. Once the order goes through, the shares are credited electronically in your demat account.
When you sell your shares, your sell order will also be handled by your trade account. When the trade is executed and settled the shares are moved from your demat account to the buyerโs account. And then the money is sent into the linked bank account after the sale is made.
Demat Account vs Trading Account
| Feature | Demat Account | Trading Account |
| Purpose | Stores securities electronically | Used to buy and sell securities |
| Functions Like | Digital locker | Transaction account |
| Holds Shares | Yes | No |
| Executes Trades | No | Yes |
| Linked To | Depository (CDSL/NSDL) | Stock Exchanges (NSE/BSE) |
| Required for Investing | Yes | Yes |
The Journey of a Stock Trade: How Trading and Demat Accounts Work
This is where a lot of beginners get confused. To understand the difference, letโs see what happens when you choose to buy shares of a company.
The two accounts do different things, but they work together seamlessly behind the scenes.
A Simple Example to Understand the Difference
A good way to remember the difference is to think of buying on the Internet.
Think of your trading account as a shopping cart. It allows you to select, buy and complete transactions. But the shopping cart doesn't save your purchases forever. Once you have placed an order, the things are delivered and stored safely at your home.
Similarly, when it comes to investments, the trading account is used to send buy and sell orders for securities, while the demat account is basically a virtual vault where your acquired shares and investments are stored securely.
To sum up:
Trading account = This is used to buy and sell investments.
Demat account = holds your investment in this account
Conclusion
A trading account allows you to buy and sell investments, while a demat Account stores them securely in electronic form.
One helps you buy and sell. The other helps you hold your investments.
One of the first steps in becoming a confident investor is understanding the difference between these two accounts. Understanding how they work together makes the stock market so much easier to navigate.
FAQ's
1. Is a trading account and a demat account the same?
No, demat account and trading account are different. A trading account is used to buy and sell shares while a demat account is used to hold shares and other investments electronically. To invest in stock market both these accounts are needed.
2. Can I buy shares without a trading account?
No, you need a trading account to buy or sell the stocks in the market. Trading accounts in stocks allow you to place orders in the stock exchanges. The stocks that you buy will be stored in your demat account.
3. Is it possible to open a demat account without a trading account?
You can open a demat account without a trading account, but you will not be able to buy or sell shares. A demat account is where your shares are held. But for active trading in shares traded on stock exchanges, you need a trading account.
4. What happens to the money when I buy or sell shares?
When you buy shares, the required funds are debited from your linked bank account as part of the trade settlement process. After the trade is completed and settled, your demat account is credited with the shares you bought.
Whenever you sell shares, the shares get deducted from your demat account and the sale proceeds get credited to your linked bank account.
Ready to Start Investing?
Open your Demat and Trading Account with 021 Trade
