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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, and 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, the 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 canceled 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.
Learn about Unlisted Shares.
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 a 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 a demat account is good enough. Even for pre IPO applications only a 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) a 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 accounts.
Is it possible to operate a 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 smartphone. A demat account can be operated online by signing a 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.
What are the Difference Between Demat and Trading Account?
For a 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.
Things to Know Before Opening a Demat Account
The demat account holds your shares and other securities in custody in electronic format. Opening and operating a demat account is a major financial decision because it is going to hold all your investments in electronic form. Even before you open an account, here are 8 rudimentary things you must know.
1- Be clear on why you are opening your demat account
A demat account is your gateway to the world of equity investments. It is not possible to create wealth in the long run by investing in bank FDs or gold. For wealth creation, the best choice over the long run is equities. And for equity investing you need an account for holding shares in electronic form.
2- Know the process of opening demat account
The process to open a demat account is fairly simple. Once you identify the depository participant (DP), you can go ahead with account opening formalities. This includes submitting your proof of identity, proof of residence and signing off on the broker agreement.
3- Know the costs of running a demat account
All good things have a cost and so does this type of account. AMC is charged annually and all debits have to be paid for. In addition, there are charges for submission of DRF, DIS rejection etc. If you want a real low-cost account, you can opt for BSDA demat account for value below Rs.2 lakh. However, you can only have one BSDA account.
4- Understanding nomination, transfer and transmission
There are some important facets of a demat account that you need to apprehend. Like in the case of a bank account, it is always better to nominate a successor to your account. This could be your spouse, son or daughter. Transfer is voluntary and SEBI allows you to do an off-market transfer of shares from one demat account to another and there is no capital gain if the transfer is to relatives.
5- Know how demat account reduces your costs and risks
While the demat account has a cost as discussed earlier, it actually saves costs compared to the physical form. Firstly, the waiting time is reduced to just 2 days. Secondly, the costs like mailing of certificates, rectifying bad deliveries, risk of loss of certificates, risk of mutilation of certificates etc. Demat, therefore, substantially reduces your effective costs because of its in-built security features.
6- Know how demat account makes transacting safer
This is an extension of the previous point. Demat largely does away with the risk of duplicate certificates, forgery of signatures, frauds etc. Since the bank account, demat account and trading account are seamlessly linked, there are multiple levels of checks and balances in the entire process. This works in the interest of the investor holding the account.
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7- Saves you time on corporate actions
This is a big relief for investors. In the old days, corporate actions would be very inconvenient. Bonus and splits would entail the issue of fresh certificates by the registrar. There was a major manual aspect to the process as compared to the demat model. Dividends are another big difference. When the company pays out a dividend, the status of holding on ex-date is automatically checked by the system and processed. Once the process is done, the dividends are directly credited to your bank account via electronic fund transfer. In case of non-financial corporate actions like splits and bonuses, the credit in demat account is automatic.
8- Saves a lot of administrative time and effort
If you held shares in 10 companies and changed your address, how would you communicate the address change in the old days? You may be surprised, but you had to individually write to each of these companies to change the address. That is not a problem any longer. You just write once about the address change to the DP and all the company records are automatically updated. This also applies to change of phone number, email etc.
Even as you consider all the above points, remember to read the fine print of the demat agreement. The costs are clearly mentioned here. Read specifically about costs and your liability and the DP’s liability before signing on the dotted line.
