If you are searching for the difference between Demat and trading account and related information like charges, funds flow, etc then this will be the end of your search.
Every one of us knows that a Demat account is necessary to invest in the stock market. But many of us do not know about Trading Account, and they don’t know the difference between Demat and Trading account.
In this article you will get detailed information about the purpose of each account, Associated charges, account opening process, and the function of each account.
Difference Between Demat and Trading Account
Demat Account is used only for holding Shares and Securities in electronic form which acts as a locker system for our investment. It does not hold or maintain any monetary or cash amount. We do not log in to the Demat account on a daily basis to sell or buy security / shares.
Trading account is used to buy / sell equity shares, debentures, ETFs and mutual funds, it can also be used to keep an eye on the equity market.
All the monetary transactions are managed by the trading account. We also pay Demat account Maintenance Charges and also get paid Trading Account.
Having Trading account becomes easier and cheaper to trade. As it is a broker’s account we don’t need to find a buyer or seller. The process is completely online. When we trade online we pay very few charges for STT / CTT (Securities or Commodities Transaction Tax respectively).
Otherwise, Stamp Duty charges are huge for offline trades.
Now, it’s time to understand the differences in detail. Until you read the following you can watch this Hindi video side by side.
Before understanding the concept of Demat Account we have to know a little history of Trading.
In earlier days people used to Buy/Sell shares offline. That means brokers used to take money from the buyer and physical share certificates (In material documents form) from the seller and then used to exchange in the market. This process used to get settled on a T+30 basis.
T+30 meant Traded day and 30 days. When you sell shares you will get money after 30 days. And if you are a buyer then you will get a share certificate after 30 days. But in this offline process, tracking was extremely difficult if anyone got cheated by the fake share certificates.
To avoid this risk SEBI decided to make this process electronic so that people could open their online account called as Demat i.e. Dematerialized account which is like an electronic locker for keeping our shares and securities safe.
Demat Accounts managing companies hold all accounts of traders and investors and deposit their shares in their respective accounts electronically and make settlement easy and secure. Hence, those companies are called as Share Depositories.
In India there are two such Depository companies,
- National Securities Depository Ltd. (NSDL) (Founded on 8th August 1996)
- Central Depositories Services India Ltd. (CDSL) (Founded in February 1999)
These both companies are owned by the government.
Demat Account Facilities
Let’s see all the benefits of having a Demat Account
- Security of Holding Shares
- Tracking of Shares
- Linking multiple trading accounts
- Easier in Swing / Weekly Trading
- Holds all the investments like
- Government securities
- Exchange-traded funds
- Mutual funds
Types of Demat Accounts
There are two types of Demat accounts. One is Regular and another one is BSDA. Let’s understand each one.
Regular account is such an account which is opened by the Stock Brokers on a normal basis. Which has no limit for any transaction or investment. But it carries Periodic Maintenance Charge for holding such an account.
One person can open unlimited no of regular Demat accounts.
There are some other types of regular accounts there. You can know about them from this link.
- BSDA (Basic Service Demat Account)
This is a special category Demat Account which is made for small investors to get the benefit of low or nil maintenance charges.
As per the SEBI’s Press Release no. 79/2012 any Retail small Individual who fits into this following requirement can open or convert his account as BSDA. Those requirements are as below.
- Investor should be an Individual person holding a single Demat account.
- His shares holding should be lesser than worth Rs. 50000
- If investment crosses Rs. 50 thousand but less than Rs. 2 lac then he will be charged up to Rs. 100 + GST.
- But when he crosses Rs. 2 lac investment then his account will be converted automatically to Regular account.
What are the Charges associated with Demat Account?
Charges associated with Demat Account and how we pay?
In your Demat account too, the securities are held and accordingly debited and credited. You do not need to have any shares to open a Demat account; In fact, you can even have zero balance in your account.
What is a Trading Account?
Trading account is an Account which is opened by a Stock Broker (Also called as Exchange Member) to make transactions in the stock market like Buying or Selling shares/securities, paying various Changes like Demat AMC and transaction costs including Brokerage, Cess and Taxes.
Trading Account Facilities
Trading account is the only account which is used extensively by a Trader or Investor.
All the facilities are provided by Trading Account is as below.
- Buying and Selling of Securities
- Using charts and its tools for quick trading
- Watch all types of securities such as
- Equity Shares
- REIT / InvIT
- Mutual Funds
- Contract Note of Daily Transactions
- Adding or Withdrawing funds
- Checking Profit or Loss Statement
- Separating Intraday, F&O, Short and Long Term income to file Income Tax
Charges for opening a Trading Account?
There might be a one time charge for opening Demat and Trading accounts. But there is no broker who is charging for Trading Account nowadays.
The Best Trading and Demat Account?
By having a motto to help traders and investors to get proper and correct knowledge of the stock market we are taking efforts to make you profitable.
As per our personal experience we recommend the best broker which opens your account quickly, and they are very much cheap in price.
You may notice and compare yourself with all other brokers so that you will get to know why we are recommending.
Here is the List of Broker which is beneficial for you always in the long term. You have to choose as per your wish.
When you open any of this account you are going to avail the free in Person guidance and help in learning and understanding the market from Arable Life.
You just need to email us telling your Client Code within 7 days.
This broker facilitates no brokerage on investments and having the best Trading Terminal for your Mobile and Web Platform.
Other features are as follows
- Stable technical chart for quick trading
- 0% Brokerage on Delivery Trading
- 0.05% up to ₹20 per order in Intraday Trading
- Just ₹20 for F&O per order executes (Unlimited lot size)
This broker facilitates flat ₹20 brokerage on order executed (Unlimited size).
Other features are as follows
- Flat ₹20 Brokerage on each order executed on all segments
- Partnered with various tools like Sensibull, etc
- Provides Research on Stock Selection
How Demat and Trading Accounts attached?
As we have seen there are 2 Demat Depositories (CDSL and NSDL) in India but it doesn’t make any difference for us. Because they are backend accounts. What actually matters is the Trading Account.
Because a trading account is the one in which we handle actually every day transactions using software. Nowadays we don’t need to call a broker to place trades.
One Individual can have multiple Trading and Demat accounts. You can also have a single Demat account linked with multiple Trading Accounts. This helps you to save much AMC money applicable for maintaining multiple Demat accounts.
You can buy delivery holding shares for investment from any of the trading accounts but you must have to sell those holdings from only that trading account to whom you have given your Power Of Attorney.
That means there are two types of linking.
- With POA – Selling is authorized with only single broker i.e. Trading Account (You can also buy from that trading account)
- Without POA – Unlimited trading accounts (But applicable only for buying not selling)
Funds flow between Demat and Trading Accounts
We may wonder how our funds flow through when we invest our money until shares get deposited into our Demat account.
Let’s understand how funds move at each step in pictorial form.
- Bank to Trading Account – When we add money (Pay In) to trading account
- Trading Account to Exchange (Market) – When we buy shares
- Exchange to Demat Account – After settlement (currently T+2) shares get deposited into our Demat Account
This means that a Trading Account is linked with a Bank and Demat Account.
Is there any Risk in Giving POA to a Broker?
Earlier to the Demat Account system there were no online based trading available.
All the investors used to have Physical (Material) shares certificated in their home. When they need to sell those shares they had to take those shares to the broker’s office, to handover them for sale.
After establishing the Demat Account seller used to fill the DIS (Delivery Instruction Slip) and handover to broker which would give the authority to the broker to sell shares.
There was no POA (Power Of Attorney) system in the picture. Because traders had to still meet the broker’s office once in a while to check the price of the share.
But as the internet technology advanced more and more brokers started developing their own software for their clients (i.e. Investors) so that they can watch stock prices and trade on their own. It makes the process quicker, easier and also cheaper. But it requires permanent authority to the Broker to place trades through the software by his client. Thus, the POA came into existence for the whole transaction system.
POA is required just for selling shares which are in the Demat Account. That is to sell holding shares we have to sign a POA form and give it to the broker. So we don’t need to fill the DIS every time an investor wants to sell his shares.
But there were some brokers who misused this authority for their benefits. They used to transact into the shares without the client’s consent. Just to make brokerage for their firm.
As a result SEBI has penalized those brokers heavily.
Now this will not be the case. But still if you think that you don’t want to give them complete authority to sell the shares, you can. By using a TPIN facility you can give the consent of only those shares which you want to sell at the moment.
If you liked this article then please comment your thoughts and share with all your friends who are having confusion about the difference between Demat and Trading Account and other related queries such as charges, AMC, types and funds flow between banks to Demat.
Thanks for Reading it carefully