You can create wealth in a number of ways in stock market. To invest in the market, it is advisable to have a knowledge of the stock exchange requirements. One of the primary requirements to trade in the market is having a Demat and Trading account. These accounts are mandatory to buy and sell stocks in the share market by holding them in digital form. Often new investors are confused about the purpose of these accounts and demat trading meaning. Let’s have a detailed study of both and their relationship.
Demat Account Meaning
Dematerialized or Demat account is an account that holds the electronic form of an investor’s financial holdings. The word dematerialization means, converting physical shares into electronic form. In the process of Demat account opening, the trader is given a unique demat account number, which he can use to settle his trades.
Demat account functions on the pattern of a bank account and allows the account holder to deposit and withdraw securities. You can actually open a Demat account with zero balance. A diverse range of investments like bonds, government securities, equity shares, exchange traded funds and mutual funds are all held in a demat account.
Trading Account Meaning
A Trading account is mandatory to conduct trading in stock market. The shares of a company listed in the stock market can be traded electronically through a trading account. You can get a Trading account easily. All you need to do is open a demat & trading account with a SEBI registered stockbroker. You would get a unique trading ID along with the trading account, to carry out your trading transactions.
Trading accounts function as a bridge between your Demat account and your Bank account. You would have to use your Trading account to place your order for the purchase of shares. When you place this order, it is sent to the stock exchange for the purpose of processing. After that, the price of the stocks purchased by you is deducted from the Demat account and you receive the shares in your Demat account.
Demat Account and Trading Account Differences
- Trading account is a tool to transact your financial instruments while a Demat account is used by a trader to hold them.
- Trading account functions similar to a Current account and lets you conduct trade while a Demat account functions similar to a Savings account and lets you hold the financial assets.
- Financial securities like share certificates are held in electronic form in a Demat account while a Trading account is used to buy and sell these securities.
- Maintaining a Demat account involves paying charges while no such charges have to be paid for a Trading account.
- Trading account lists capital market transactions over a time period while a Demat account captures the effects on your wealth in the given time period.
- The settlement in a Demat account is done within a short time period, hence reducing the risk of delays. On the other hand, settlements in a trading account take time as they are done over a time period.
Can You Have a Demat Account in The Absence Of A Trading Account?
It is okay to have a Demat account in the absence of a Trading account. If you wish to hold some securities for a long time, without conducting trade in them, you need not open a Trading account and store your securities in your Demat account. Additionally, a Demat account is required to apply for an IPO but it is not mandatory to have a Trading account to do so.
Can You Have A Trading Account in The Absence of a Demat Account?
Here too, it is possible to have a Trading account in the absence of a Demat account. Through a Trading account, a trader can trade in Futures and Options. This does not require having a Demat account as there is no need to take the delivery of shares in Futures and Options.
Trading account and Demat account, both are required by a trader to conduct seamless trades in the stock market. Although both the accounts have different natures and purposes, they are closely related to each other and complement each other.
