This article is part 5 of the Basics section of our Stock Market Learning series created by SMJ. It provides a clear and straightforward explanation of Demat and Trading accounts, which are essential for participating in the Indian stock market. You’ll learn what these accounts are, why they are important, the differences between them, and how to open them. Our goal is to help beginners grasp these fundamental concepts and feel more confident about trading and investing in the stock market.
Investing in the Indian stock market offers a promising avenue for building wealth and achieving financial goals. However, to get started, it’s essential to understand the basic tools required for trading and investing. Two of the most crucial components in this process are the Demat and Trading accounts.
A Demat account holds your securities in digital form, while a Trading account provides the platform to buy and sell those securities. Together, they streamline the trading and investing process, making it convenient and secure for investors.
What is a Demat Account?
A Demat account, short for dematerialization account, is an electronic repository that holds your financial securities in a digital format. Just like a bank account holds your money, a Demat account holds your investments such as stocks, bonds, mutual funds, and other financial instruments.
Bank Account – Stores currency and facilitates cash transactions.
Demat Account – Stores financial securities electronically and facilitates the holding of investments.
The primary purpose of a Demat account is to eliminate the need for physical share certificates, reducing the risks associated with physical storage, such as theft, loss, or damage. It also streamlines the process of managing your securities, making tracking and trading them easier.
Also Read: What is the Stock Market & How Does It Work?
Types of Financial Instruments Stored
Stocks – Shares of publicly traded companies like Reliance Industries or Infosys.
Bonds – Government and corporate bonds.
Mutual Funds – Units of mutual fund schemes.
Exchange-Traded Funds (ETFs) – Funds that track indexes like the Nifty 50 or Sensex.
Government Securities – Treasury bills and other government-issued securities.
How a Demat Account Works
When you buy securities, they are credited to your Demat account, and when you sell them, they are debited from it. This electronic system makes the entire process seamless and efficient, allowing for quick and easy transfers of ownership.
Benefits of a Demat Account
1. Eliminates the risks associated with physical certificates, such as loss, theft, or damage.
2. Simplifies the management of investments by providing a single platform to hold various types of securities.
3. Allows you to access and manage your investments online through computers or smartphones.
4. Facilitates faster settlement of trades compared to the traditional paper-based system.
5. Reduces the costs associated with physical certificate issuance, handling, and transfer.
What is a Trading Account?
A Trading account is a digital platform that allows investors to buy and sell financial securities in the stock market. It serves as an interface between your bank account and your Demat account, enabling you to execute trades and manage your investment transactions.
While a Demat account holds your securities in electronic form, a Trading account is used to place buy and sell orders in the stock market. When you want to purchase shares, you use your Trading account to place an order, and the shares are then credited to your Demat account. Similarly, when you sell shares, the order is placed through your Trading account, and the proceeds are credited to your bank account.
How a Trading Account Works
1. Linking Accounts – Your Trading account is linked to both your bank account and your Demat account. This linkage ensures seamless transfer of funds and securities.
2. Placing Orders – To buy or sell securities, you log into your Trading account and place an order. The order is routed through the stock exchange, and once executed, the securities are either credited to or debited from your Demat account.
3. Transaction Execution – The Trading account facilitates real-time execution of buy and sell orders, providing you with up-to-date information on market prices and order status.
Types of Transactions Facilitated
Buying Stocks – Purchase shares of companies like Reliance Industries or Infosys.
Selling Stocks – Sell shares that you hold in your Demat account.
Trading in Futures and Options – Participate in derivatives trading, which involves contracts based on the value of underlying assets.
Investing in IPOs – Apply for shares during Initial Public Offerings (IPOs).
Other Securities – Trade bonds, government securities, and other financial instruments.
Benefits of a Trading Account
1. Provides access to multiple stock exchanges, such as NSE and BSE, allowing you to trade a wide range of securities.
2. Enables real-time order execution and tracking, ensuring you can take advantage of market movements.
3. Offers various tools and resources, such as market analysis, charts, and research reports, to aid in making informed investment decisions.
4. Allows you to trade from anywhere using online platforms, mobile apps, or through your stockbroker.
5. Seamlessly integrates with your bank and Demat accounts for smooth transfer of funds and securities.
Differences Between Demat and Trading Accounts
| Particulars | Demat Account | Trading Account |
| Definition | Digital account holding securities electronically | Digital account for buying and selling securities |
| Primary Role | Store securities electronically | Facilitate trading transactions |
| Issuing Entity | Depository Participant (DP) | SEBI-registered stockbroker |
| Unique Identifier | 16-digit Demat account number | Unique trading ID |
| Charges | AMC, transaction fees, dematerialization fees | Brokerage fees, transaction charges |
Also Read: Long-Term Investment in Stock Market – What, Why, How?
Why You Need Both Accounts
Investing in the Indian stock market requires the use of both a Demat account and a Trading account. Each account serves a unique and crucial role, and together, they enable seamless and efficient stock market operations.
Integrated Functionality
Demat Account
- Holds your purchased securities, such as stocks, bonds, and mutual funds, in electronic form.
- Provides a secure way to store investments, eliminating risks associated with physical certificates like loss, theft, or damage.
Trading Account
- Facilitates the buying and selling of securities. It acts as an interface between the investor and the stock exchange.
- Enables you to place orders to buy or sell securities. These transactions are then settled into and out of your Demat account.
Combined Workflow
- When you decide to purchase shares, you use your Trading account to place a buy order.
- The purchased shares are credited to your Demat account, where they are securely stored.
- Similarly, when you sell shares, the order is placed through your Trading account, and the shares are debited from your Demat account.
Benefits of Having Both Accounts
1. Seamless Trading Experience
The combination of Demat and Trading accounts allows for a smooth trading process. You can easily buy and sell securities without worrying about the physical transfer of share certificates.
2. Safety and Security
Demat accounts provide a safe and secure way to hold your investments electronically, reducing the risks associated with physical certificates.
3. Efficient Management
Having both accounts linked enables efficient management of your investments. You can monitor your holdings, track transactions, and manage your portfolio effectively.
4. Regulatory Compliance
Both accounts are regulated by the Securities and Exchange Board of India (SEBI), ensuring that your investments are protected by stringent regulatory standards.
5. Access to a Wide Range of Investments
With both accounts, you can trade in various financial instruments, including stocks, bonds, and other securities, enhancing your investment opportunities.
Practical Example
Consider an investor who wants to invest in shares of Tata Consultancy Services (TCS).
Step 1: Placing an Order
The investor logs into his Trading account and places a buy order for TCS shares.
Step 2: Execution and Settlement
The order is executed on the stock exchange. The shares are then credited to his Demat account.
Step 3: Holding Shares
The TCS shares are stored securely in his Demat account.
Step 4: Selling Shares
When the Investor decides to sell his TCS shares, he places a sell order through his Trading account. The shares are debited from his Demat account, and the proceeds are credited to his bank account.
How to Open a Demat and Trading Account
Many brokers offer the option to open a combined Demat and Trading account, simplifying the process.
1. Visit the Broker’s Website
Choose a broker that offers both Demat and Trading accounts, like Zerodha, Upstox, ICICI Direct, or HDFC Securities.
2. Fill Out the Combined Application Form
Provide your personal details, bank details, and other necessary information in a single form.
3. Submit Required Documents
Upload or provide copies of identity proof, PAN card, address proof, bank proof, and photographs.
4. Complete In-Person Verification (IPV)
Complete the IPV process online or at the broker’s office. (Process can vary depending on your broker)
5. E-Sign the Documents
E-sign the documents using your Aadhaar-linked phone number.
6. Review and Submit the Application
Review all details and submit the application. The broker will process your application for both accounts simultaneously.
7. Receive Account Details
Once approved, you will receive login credentials and account details for both your Demat and Trading accounts.
Fees and Charges
Understanding these fees and charges is crucial for managing your investment costs effectively. By being aware of the potential expenses, you can make informed decisions and select the best Demat and Trading account providers for your investment needs.
| Fee Type | Demat Account Charges | Trading Account Charges |
| Account Opening | Free to nominal fee (e.g., ₹300 with some brokers) | Free to nominal fee (e.g., ₹300 with some brokers) |
| Annual Maintenance Charge (AMC) | ₹300 to ₹700 per year | None |
| Transaction Charges | ₹13.5 per ISIN for debit transactions | Exchange transaction charges (0.00325% on NSE) |
| Brokerage Charges | None (Handled by Trading account) | ₹20 per trade or 0.03% of trade value |
| Dematerialization Charges | ₹3 per certificate or ₹50 per request | Not applicable |
| Rematerialization Charges | ₹25 per certificate or ₹10 per 100 securities | Not applicable |
| Off-Market Transfer Charges | ₹25 or 0.03% of transaction value | Not applicable |
| Custodian Fees | ₹0.5 to ₹1 per ISIN | Not applicable |
| Securities Transaction Tax (STT) | Not applicable | 0.1% on buy and sell for delivery-based trades |
| Goods and Services Tax (GST) | 18% on transaction and other fees | 18% on brokerage and transaction charges |
| Stamp Duty | Not applicable | 0.015% of the turnover for delivery-based trades |
| Call and Trade Charges | Not applicable | ₹50 per call |
| SMS Alerts | Not applicable | ₹0.25 per SMS |
Can You Have One Without the Other?
Understanding the relationship between Demat and Trading accounts is crucial for any investor in the Indian stock market. While these accounts serve distinct functions, they are interdependent in facilitating smooth and efficient trading.
Demat Account Without a Trading Account
Limitations
- Without a Trading account, you cannot buy or sell securities in the stock market. A Demat account alone only allows you to hold and store securities.
- The primary purpose of a Demat account is to serve as a repository. To actively participate in trading activities, a Trading account is essential.
Example
If you have a Demat account with HDFC Securities but no Trading account, you can receive shares transferred to you as a gift or through an off-market transaction, but you cannot purchase new shares or sell your existing holdings directly in the stock market.
Trading Account Without a Demat Account
Limitations
- Without a Demat account, you cannot hold the securities you purchase. The Trading account only facilitates transactions; it does not store securities.
- All buy and sell transactions require settlement through a Demat account. Without one, the purchased securities have no place to be stored.
Example
If you have a Trading account with Zerodha but no Demat account, you can place orders to buy shares, but you will not be able to take delivery of these shares. Similarly, you cannot sell any shares because there is no Demat account to debit them from.
Integrated Use of Both Accounts
To fully participate in the Indian stock market, you need both a Demat and a Trading account. Here’s how they work together:
Buying Shares
1. Use your Trading account to place a buy order for a company’s shares.
2. The order is executed on the stock exchange.
3. The purchased shares are credited to your Demat account.
Selling Shares
1. Use your Trading account to place a sell order for shares you hold.
2. The order is executed on the stock exchange.
3. The shares are debited from your Demat account, and the proceeds are credited to your bank account.
Why Both Are Essential
1. Both accounts together enable seamless trading activities, from executing orders to storing securities.
2. SEBI regulations require that all securities transactions are settled through Demat accounts, making it mandatory to have both accounts.
3. Having both accounts linked provides convenience and efficiency in managing your investments and tracking your portfolio.
Benefits of Digital Accounts
Digital accounts, including Demat and Trading accounts, have revolutionized the way investors participate in the stock market. They offer numerous advantages over traditional paper-based methods, making investing more accessible, efficient, and secure.
1. Convenience and Accessibility
- Digital accounts allow you to access your investments anytime, anywhere using a computer or smartphone.
- User-friendly online platforms and mobile apps make it easy to manage your investments, place orders, and track your portfolio.
2. Enhanced Security
- Digital accounts eliminate the risks associated with physical share certificates, such as theft, loss, or damage.
- Advanced security measures, such as encryption and two-factor authentication, protect your accounts from unauthorized access.
3. Quick and Efficient Transactions
- Digital Trading accounts enable real-time execution of buy and sell orders, allowing you to take advantage of market opportunities instantly.
- Electronic settlements through Demat accounts are quicker and more efficient compared to manual processes.
4. Reduced Paperwork
- Digital accounts significantly reduce the need for physical paperwork, making the account opening process and subsequent transactions hassle-free.
- Many brokers offer e-signature options, further simplifying documentation requirements.
5. Cost-Effective
- Digital platforms often have lower brokerage and transaction fees compared to traditional methods. Some brokers even offer zero brokerage on certain trades.
- With digital accounts, there’s no need to store physical certificates, saving on associated costs.
6. Integration and Consolidation
- Digital accounts allow you to manage all your investments—stocks, bonds, mutual funds, and ETFs—from a single platform.
- Seamless integration between your Demat, Trading, and bank accounts facilitates smooth transactions and fund transfers.
7. Transparency and Tracking
- Get real-time updates on your portfolio’s performance, market news, and stock prices.
- Access detailed transaction statements, account summaries, and reports online, enhancing transparency and helping you keep track of your investments.
8. Simplified Portfolio Management
- Easily diversify your portfolio by investing in a variety of financial instruments through a single platform.
- Many digital platforms offer automated features like SIPs (Systematic Investment Plans), alerts, and reminders to help you manage your investments effectively.
9. Educational Resources and Tools
- Access to a wealth of educational resources, including articles, webinars, tutorials, and market research reports, to help you make informed investment decisions.
- Use advanced analytical tools, charts, and calculators to analyze market trends and optimize your investment strategy.
10. Enhanced Customer Support
- Many digital platforms provide robust customer support through chatbots, email, and live chat, ensuring quick resolution of queries and issues.
- Access comprehensive help centers and FAQs to find answers to common questions and learn how to use various platform features.
This article is a basic step in understanding Demat and Trading accounts in the Indian stock market. While we aim to provide accurate and up-to-date information, investing in stocks always involves risk, and there are no guarantees of profit. The value of investments can go up as well as down, and you may not get back the amount you originally invested.
The stocks and brokers mentioned in this article are provided solely for illustrative purposes and should not be construed as recommendations for investment. We do not recommend any specific stocks, brokers, or encourage jumping into the stock market without thorough research and understanding.
It’s crucial to conduct your own research or consult with a financial advisor to tailor your investment strategy to your individual goals and risk tolerance. Follow the entire series to gain a comprehensive understanding and become a knowledgeable trader or investor. Always remember to invest wisely and consider your long-term financial objectives.
