What is the difference between a Trading Account and a Demat Account?

Demat account is an online repository for the storage of the shares bought and kept in a secured digital format, while a trading account acts as a transacting interface between the buyers and the sellers in the stock market.

It is easy for most people to get confused between the difference between a Demat account and a trading account. Traders have to store the shares they bought somewhere, so conventional logic should state that a Demat account is the same as a trading account. However, this is incorrect, and both of these accounts are not the same.

In this article, we will cover the difference between a Demat account and a trading account, how their functionalities are different, whether they are independent of each other, and what are the account opening charges concerning the accounts?

Demat Account vs. Trading Account

Demat account, short for ‘dematerialized account’, is an online repository for the storage of the shares bought and kept in a secured digital format, while a trading account acts as a transacting interface between the buyers and the sellers in the stock market. You buy and sell shares through your trading account, while you store them in your Demat account.

The functionalities of Demat and Trading Account

As we have previously mentioned in “How to Open a Demat Account”,  shares are not bought and sold in a stock exchange building anymore but are traded in digital mode. This means that you don’t need to worry about the security of your share certificates, as these shares are stored in digital mode through a Demat Account. Likewise, you can place buy and sell orders through a trading account from your mobile device or your laptop from anywhere in the world with an internet connection.

The purpose of your Demat account is to show you all the shares that you are holding as of the moment you are checking them, while the purpose of a trading account is to show you all the buying and selling transactions that you have performed.

Are the two accounts interrelated?

The entire process of completing a trade requires both accounts. You will require an interface to the stock market to execute buy/sell orders and then a storage repository to keep those shares in a safe and secured manner. The role of the interface is fulfilled by the trading account, while the role of the repository is fulfilled by the Demat Account.

It is important to note that the Demat account is useful for only taking the delivery when trading in equity or in the successful application of an Initial Public Offering. The Demat account does not directly assist you in the execution of the buy/sell orders in the stock exchange. You will need a trading account to fulfill that purpose.

Remember that your trading account is directly linked to your bank account, from which you will be able to add the required funds to your trading account, and send funds (or profits) back into your bank account. Also, you will be able to trade in the derivatives segment (i.e. Futures and Options) only with a trading account, as it doesn’t involve the direct ownership of shares. Both these accounts are required to perform contrasting jobs, but are still closely integrated in order to make the trading experience quick and comfortable for the retail traders.

Can I have a Demat account without a Trading account or vice versa?

The answer to this is yes. You can have a Demat account without having a trading account, or also a trading account without a Demat account.

If you are only interested in buying and holding your purchased shares for the very long term without any intention of selling them in the near future (regardless of any market crashes), you will not be required to have an active trading account. You are also not required to have an actively functioning trading account for the application and allotment of shares from Initial Public Offerings (IPOs). However, having a Demat account is necessary for both scenarios.

Conversely, you can choose to not have a Demat account if you are only interested in trading in the derivatives segment i.e. Futures and Options. Since you’re not required to take delivery of shares, you are only required to have a Trading account.

CAUTION:- Contrary to index options and index futures, stock options and stock futures tend to be delivery settled at the expiry of the contracts, requiring you to have a Demat account if you choose to go for that. Index options and futures, like Nifty and Bank Nifty, are cash-settled at expiry and do not require a Demat account.

Charges to be paid for the accounts

Having both a Demat account and a trading account brings you the convenience of all-round share trading to your laptop or mobile device. As these accounts offer such massive convenience right to your fingertips, there will naturally be software and human resource responsible for maintaining these services to provide the necessary support to your trading experience. As a result, there will be charges levied for availing these services, which are broadly classified into:-

a) Demat Annual Maintenance Charge is a recurring cost that is associated with the amount to be paid every year to maintain your Demat account effectively.

b) Demat/Remat Charges are levied on the conversion of shares from its digital to physical form and vice versa. The conversion of the shares from physical form to digital form is called dematerialization (aka Demat) and the reconversion of the shares from digital form to physical form is called rematerialization (aka Remat).

c) Off-market Transfer Charges are levied in case of transferring the shares from one Demat to the other outside the typical stock markets, typically for gifting these shares to a family member.

d) Brokerage charges are levied on the shares transacted by your broker for the middlemen services it offers between you and the opposite party. These charges can either be a percentage of the transacted value or a flat fee per order, depending on whether it is a full-service broker or a discount broker.

e) Opening Charges are the flat fee required for opening a Demat and/or trading account.