Are you thinking of investing your money in the stock market? Then you must have done your research and heard of words like the demat account and the trading account! Wondering if both are the same? No, they are not! Read on to find out what each one is, and all that you need to know about them!
What is a demat account?
The SEBI passed a mandate in 1996, that all your shares should be converted to an electronic format. As part of this, you need to have a demat account to store all the shares that you have purchased. It is mandatory to have a demat account if you wish to invest your money in the stock market. However, you cannot buy or sell your shares with this account. Meaning, a demat account only acts a storage of all the purchased shares.
What is a trading account?
If you wish to buy or sell your shares, you need to have a trading account. As the name implies, it is an account that helps you trade in the stock market. You register for a trading account with a stock broker or a firm. Each account comes with a unique trading ID, which is used for conducting transactions.
Relationship between a demat and trading account
A trading account acts an interface between your demat account and the stock market. Meaning, if you wish to buy any shares, then you can place an order using your trading account. The shares that you have purchased get stored into your demat account. Similarly, if you wish to sell the shares that are lying in your demat account and make some profit, you can do so using your trading account.
Things to remember while opening your account
Opening a demat account or a trading account is as easy as opening a simple bank account. Just choose your DP (depository participant- normally the banks), fill up the details in the account opening form and submit the documents. You will go through a personal verification process and after that your account number and ID are provided. You are ready with your account.
However keep in mind the following key factors while opening your account
- Account opening charges and maintenance charges: Depending on your risk appetite and temperament, you could be a vibrant investor or a passive investor. If you are a passive investor, keep a watchful eye on the maintenance charges for your account. Be cognizant of what you are paying. Cheapest choice is your best choice.
- Intraday trade charges: When you buy and sell your stocks on the same day, it is called as intraday trading. Some DPs charge exuberantly for your intraday trading. Again, remember to keep an eye on these charges and choose the best.
- Other charges: Loan pledge, account freezing, ad-hoc statements, options trading, failed transactions – all these are charged. Remember to check these too, while opening your account.
While you can choose to have your demat account with one DP and your trading account with another, you would be surprised to see the benefits that you get by maintaining both these accounts with a single DP.
- Most of them offer to open your trading account for free when you open a demat account with them.
- Your maintenance charges might get waived off depending on your transactions and trading activities.
- You get to have your funds transferred quickly.
- Reduction in paperwork.