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Difference Between Demat and Trading Account

Difference Between Demat and Trading Account

| @indiablooms | 26 Apr 2024, 11:35 pm

Whether one is actively trading in stocks or occasionally investing in mutual funds, a key question that often comes up is - what is the difference between a Demat account and a trading account? With all the technical terms used, understanding their differences can be challenging for everyday investors.

This article will explain what each account means and how they work so readers can decide which one suits their needs.

What is a Trading Account? 

A trading account serves as a gateway for buying and selling investment assets - be it equity stocks, derivatives, mutual funds, etc. Opening such an account with any brokerage firm or bank gives investors direct access to the stock trading platform. One can instantly execute orders to purchase or sell financial securities of their choice through their trading account using the broker-provided application or website.

How Trading Accounts Work

Most brokerage service providers in India today offer fully digital trading platforms via mobile/web applications for quick accessibility. The process involves first creating login credentials and funding the account digitally via net banking, UPI, etc.

Once the account is activated with sufficient balance, investors can instantly start searching for stocks, derivatives or mutual funds to purchase. Upon deciding the security and investment amount, one can enter quantity, review order details, and click buy/sell - completing the transaction with a few clicks.

Selling any purchased security also works similarly. The platform allows for the entering quantity to sell and shows a complete sell order summary for review before the final sell order execution. The realised profit automatically gets credited to the share trading account for future withdrawals or investments. The operational simplicity makes such accounts extremely investor-friendly.

What is a Demat Account?

While trading accounts enable the smooth execution of investment transactions, demat accounts allow digitally storing/holding all purchased securities in one place.

Earlier, stocks and mutual funds were issued as paper certificates, making storage highly cumbersome at scale. Demat accounts eliminated this hassle by introducing "dematerialised" digital securities instead of paper-based certificates.

The demat functions as an electronic locker, providing consolidated access to assets bought using a trading account. It reflects aggregate portfolio holding, showing the number and current valuation of different securities the investor holds across multiple transactions over time. Moreover, a Demat account opening online is also a much better option to choose..

How Demat Accounts Work

If a trading account mirrors a digital shopping gateway, a Demat account can be compared to a digital e-wallet for storing financial assets. Like e-wallets store digital money, demat accounts store stocks, mutual funds and other investment instruments in electronic format.

Each purchase via trading account leads to corresponding electronic credit entry of relevant security units in the demat account instead of issuing paper certificates. This makes record-keeping easier. The Demat account statement provides an integrated portfolio view across diverse securities and their updated market value - similar to how a bank passbook reflects the current cash balance position.

Key Differences Between Demat and Trading Account

1. Purpose

Trading accounts are used to execute buying and selling of stocks, mutual funds and other securities. Demat accounts are used to hold and store the securities the investor purchases.

2. Ownership

Brokerage firms and financial services companies offer trading accounts. Demat accounts can be opened with brokers as well as banks.

3. Scope

Trading accounts only maintain records of investment amounts and any profits/losses from executed trades. Demat accounts provide statements showing overall portfolio holdings with quantity and market value details across assets.

4. Integration

Brokers usually bundle trading and demat services together to make managing investments easy. Some brokers may only allow opening trading accounts without mandatory demat accounts. Similarly, some banks offer demat accounts integrated with savings and trading platforms.

5. Usage

Actively trading investors should maintain integrated trading and demat accounts with brokers to simplify tracking and transferring assets. Occasional investors focused only on mutual funds can opt for a fund trading platform in the bank along with the bank's demat offering.

Conclusion

The trading account helps you buy/sell securities seamlessly using a broker platform like m.stock by Mirae Asset. Demat accounts eliminate paper certificates by providing digital assets storage and consolidated statements. Based on the trading frequency and portfolio mix, investors can choose suitable account combinations from various broker and bank offerings.

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