Difference Between Trading Account and Demat Account
When your broker opens your trading account, they typically open a trading cum demat
account. That is because these two accounts normally go together. What is demat
account and how to open a demat account are the basic questions.
The bigger question is the difference between ademat and trading account. Demat
and trading account is not one and the same. While your trades are executed in the
trading account, the ownership impact is felt in the demat account. You cannot hold
shares in your trading account except for a very short period of time. Similarly,
you cannot trade solely with your demat account.
Now that you have understood the nuances of trading and demat accounts, let’s deep
dive and observe it more closely…
Trading account is a flow, Demat account is a stock
This is the most important difference. The trading account is a record of transactions
of purchase and sale of shares. An intraday trade is typically executed in the trading
account but it does not impact your demat account as there is no ownership created
due to net position being zero. Only the net equity positions in your trading account
have an impact on your demat account.
Demat is about ownership of securities not about contracts
This is another very important difference between a trading account and a demat
account. You can use your trading account to buy and sell equities, buy and sell
futures or even trade in options. Your equity trading account can also be used to
trade currency futures. But equity futures, equity options and currency futures
do not impact your demat account. That is because these are just contracts and do
not represent ownership of assets.
Demat; trading account and banking are linked in a seamless loop
Your trading activity is a combination of your purchases and your sale. However,
trading is not just about trades but also payments and custody of shares. This is
how it works. When you buy shares in the trading account, the account has to be
pre-funded or you have to pay from your bank account by T+1. Then on T+2 day the
shares get credited to your demat account.
When you sell shares, then the demat account gets debited on T+1 day to the extent
of shares sold and the net amount (after costs) gets credited to your bank account
on T+2 day. That is how the relationship works.
Demat account and trading account in case of an IPO investment
When you apply for an IPO you require a demat account to get the allotment of shares
credited. But do you require a trading account to apply for IPOs. The answer is
you don’t! If you plan to get the allotment and just hold the shares in your demat
account then you do not require a trading account.
But the day you decide to sell the shares in the market, you will require a trading
account. Shares cannot be sold directly from the demat account but only through
the trading account.
Can I have a trading account without a demat account?
The answer is technically, yes. If you only intend to trade in equity futures, index
futures, index options, stock options or currency derivatives then you only require
a trading account and not a demat account. All these are contracts and do not create
any ownership rights.
Hence, you can trade all these derivative contracts without a trading account. But,
if you want to trade equities, even if only for intraday, you will require to have
a demat account too.
What is the eligibility for opening trading and demat account?
There is no eligibility criteria for opening a trading account
or demat account If you are competent to enter into a contract under the
Indian Contracts Act then you are eligible to open a trading account and a demat
account. You just need to complete the KYC and the documentation. There is a catch
As long as you only intend to trade equities, the account opening process is very
simple. However, if you want to also trade in futures and options then the broker
will insist on your income proof to ensure that you have the risk bearing capacity.
This proof can either be in the form of your bank statement or Income Tax Returns
of the last two years.