Demat account and Trading account: The Main differences
Making money in stock markets is not a gamble, but a process of systematic and scientific investments. It is important to be aware and equipped with the fundamentals of stock markets. The foremost step towards your trading journey is to open up a trading and demat account. Further, it is also important to know the difference between a Demat and a trading account.
What is a Demat Account?
Converting your physical shares into the electronic format is called dematerialization. Holding physical shares involves risk and shares in the Demat Account are stored easily. Once you open a Demat account is also known as Dematerialized account. In other words, converting or dematerializing your physical shares in the electronic format is known as holding a Demat Account.
What is a Trading Account?
A trading account is used to buy/sell shares in stock markets. Once you have a Demat Account, you need a Trading Account which has a unique trading number used to trade in shares. Once you start trading in share markets, you need three accounts: Bank/Demat/Trading Account. Trading Account acts as a link between your bank account and Demat account, allowing you to trade in stock markets. Having an online trading account helps you to secure access to multiple stock markets.
Difference between a Demat Account and a Trading Account
The following are the main key Points where a Demat and a Trading Account differ.....
The functionality of a Demat Vs a Trading Account
One major difference between the two accounts pertains to the functions each performs. A trading account is used for the buying and selling of securities by means of it getting debited from your Demat account and sold in the market. A Demat account, on the other hand, allows investors to keep their financial instruments in an electronic format. This also works in a way where you can change your electronic format securities into physical form as well.
Difference between nature of Demat & Trading accounts (stock vs. flow)
The fundamental difference is that a Trading account captures your capital market transactions over a period of time whereas a Demat account maintains the holding of shares and other securities at a point in time. Therefore, a Trading account is in the nature of flow of transactions over a period of time whereas a Demat account actually captures your wealth effect at a single point in time.
Both these accounts, as different as they may be, are crucial for any trading in the share markets. When, as an investor, you buy the shares of any company, you use the trading account to do so. The money is debited from your bank account and the shares are reflected in your Demat account where they are also credited.
Similarly, when you sell your shares through your trading account, the same gets debited from your Demat account and are then sold in the market. The proceeds of this sale are credited back to your bank account. Thus, in order to trade in the stock markets, it is mandatory to have both a Demat as well as a trading account.
Demat is measured at a specific point in time; Trading is measured over a period of time
This follows logically from the previous point. When you look at Trading account versus Demat account, this is the fundamental difference. Since Trading account captures transactions over a period of time, it is always measured over a period of time (1 month, 3 months, 1 year, etc.). Demat account, being a record of the ownership of securities, is always measured at a point in time (normally as on 31st of March of each financial year).