Demat and Trading Account: Before you begin to trade in the stock market, two most essential requirements are having a DP account and a trading account. Novice investors often get confused about the difference between a demat account and a trading account. So let us understand the key distinction between a demat account and a trading account.
Demat and Trading Account Comparison
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Meaning and Nature
When you buy shares, you need to store them in some safe place. Demat account stores the stocks that are bought and sold in dematerialised form. It is like a bank locker where you keep your valuables.
On the other hand, the trading account is a buying and selling platform which connects the stock market, bank account and the demat account. It helps to place buy or sell orders in the stock market.
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Functional Difference
A demat account holds financial instruments like shares and securities in electronic form and in turn, saves you from holding them in the paper form. The process of converting physical shares into electronic form is called dematerialisation. Demat account also helps in re-materialization that is, converting shares from electronic form to paper form (share certificate).
However, the act of buying and selling happens through the trading account.
If you wish to trade in stocks, you need to have both account. But if you wish to only trade in futures and options or currency, the trading account can serve the purpose and you don’t need a demat account for that.
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Role in the Trading Process
On purchasing the shares through a trading account, funds get transferred from the bank account and purchased shares get transferred to your demat account.
Likewise, on the event of selling the shares, the shares are pulled from the DP account, sold in the stock market at the prevailing market price and the earnings from the sale of shares are transferred to the bank account.
This signifies that the both account play a significant role in the execution of the trading process.
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Maintenance Charges
In India, a person can hold more than one DP and trading account using his/her PAN Card. There is no legal limit on the same. However, you will have to pay the Annual Maintenance Charge (AMC) for every DP account that you hold. Apart from that, you will also be required to bear the custodian fee, account opening fee and transaction fee.
In the case of a trading account, there are no extra charges required for having more than one account, except that you have to pay the initial cost of opening a trading account.
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Prerequisites for Opening the Account
To open a demat account you need to have a valid identity proof as well as address proof. Various documents like voter ID card, PAN card, Aadhar card, passport, driving license, etc. serve as valid documentary proof.
In the case of opening a trading account, the only prerequisite is to have a demat account. No documentary proofs are required to open a trading account.
The above points highlight a brief distinction between a demat account and a trading account. Having a both account ensures safe and convenient share trading. So open your both account now.
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