With the advent of technology, a lot of things have become easier to operate from. The same comfort has been witnessed in the trading and investment sector as well. Investing your money and trading in stocks are the most popular mediums to grow your wealth. Demat accounts and trading accounts are the important components of trading and investment.
What is a Demat Account?
Demat account stands for a dematerialised account and it holds all your securities in electronic form. The physical shares are converted into electronic form by the demat account. The functioning of the demat account is often equated with that of a bank account.
The way you deposit and withdraw your money in a bank account, in the same format you deposit and withdraw your securities in a demat account. You can open a demat account even if you do not have shares, that is with zero balance.
What is a Trading Account?
You can trade in the stock market only if you have a trading account. Whenever a company will list the shares in the stock market, you can trade in them only through the electronic medium for which you require a special account, this is the trading account. You open a trading account with a registered stockbroker or brokerage firm. The unique trading ID which will be assigned to you will enable you to trade in the market.
Example of Demat account and Trading account
Suppose Mohit wants to trade in shares of a specific company listed on the exchange. He will begin by placing an order for purchasing the shares through his trading account. Once the order is placed, the transaction is initiated in the exchange. When the transaction is complete, the shares are deposited in the demat account. The amount required for the trade is simultaneously deducted from the bank account linked with the trading and demat accounts.
Demat Account vs Trading Account
The demat and trading accounts are equally important and work in coordination with each other to trade shares and invest. A trading account is required for the futures and options in the share market as well as the real-time trade of the shares.
While the demat account is used for holding the securities converted to electronic form along with stocks, bonds, ETFs, etc.; the trading account on the other hand is actually responsible for the buying and selling of the shares on the stock. A trading account needs to be linked to a bank account as well as to a demat account.
Individuals can have a demat account without a trading account if they wish to just hold their securities and shares with no intention to trade them. However, it is a prerequisite to have a demat account before you open a trading account as you require it to link it with your trading account. There is an exception to this which will be explained in the following section.
What are the different types of Demat and Trading accounts?
Repatriable demat account - Funds that can be transferred abroad are known as repatriable funds and are deposited in a separate bank account which is known as Non - Resident External Account (NRE account). All the investments made from these funds is carried out through and maintained by the ‘Repatriable Demat Account’.
Non-repatriable demat account - Funds that cannot be transferred or taken abroad are deposited in Non Resident Ordinary Account (NRO account) and are known as non-repatriable funds. The ‘Non - Repatriable Demat Account’ overlooks all the transactions made through these funds and maintains them.
Equity trading account and commodity trading account - You are required to have two different accounts for trading equities and commodities. In order to trade equities, currency derivatives and futures and options you require an equity trading account.
On the other hand, in order to trade commodities, you will have to open a different ‘commodity trading account’ with your broker. The reason behind this being, commodities up till 2 years ago were overlooked by a different regulator before being merged into SEBI.
3 in 1 account - This account offers you a comprehensive plan which consists of services of demat account, savings bank account and trading account, all of them in one account. You will be trading the securities using the trading account services. The payments, receipts and other transactions will take place from the savings account feature. The securities are cleared and dematerialised in order to be stored in the demat account segment of the account.
2 in 1 account - This account aims at integrating the demat account and the trading account. This type of account is widely used and is considered as user-friendly. You can both trade and store your securities in this kind of account. This type of ‘bundled’ account is offered a majority of discount brokerages. You can link your bank account to this account to facilitate the transfer of funds.
Unbundled account - Herein, you are required to seek the services of individual accounts from different providers. In simple language, you will be dealing with a trading account, demat account and savings account separately. It would mean that you will have to get into the tedious task of linking your accounts for a smooth trade.
Can I have only a Trading account or only a Demat account?
Conventionally, it is believed that you are required to have both trading and demat accounts. However, you can choose to open either of the two but under a given set of conditions and limitations. To begin with, if you plan to invest solely in an IPO then a demat account suffices. The shares will be credited to your demat account as soon as they are allotted.
However, you need to note that you cannot sell these shares without a trading account. If you wish to only hold the shares for a longer duration then only a demat account is enough, but if you wish to sell them then you will be needing a trading account.
The second case arises when you plan to trade only in futures and options. In such a scenario, having only a trading account works and suffixes. This is because trading in futures and options do not give result to delivery for which a demat account would have been necessary. You will need a demat account along with your trading account only when you plan to hold equities.
Additionally, it is not necessarily that all transactions from your trading account will end up in delivery to the demat account. Trades of futures and options, intraday equity and currency take place through the trading account with no effect in the demat account.
On the other hand, you can buy IPOs, Gold Bonds and RBI bonds into your demat account without the required interaction of the demat-trading account.
Who should opt for an unbundled account?
Unbundled accounts are best advised for investors who wish to indulge in only storing the securities for a longer duration. You can pay to open a trading account later when you decide to sell these stored securities.
How will this help? This will help you eliminate unnecessary charges of maintaining a trading account and you will be required to pay only when you actually trade.
However, if you are a trader it is advised that you opt for bundled accounts like 2 in 1 account or 3 in 1 account. This will save the time and effort that will go into managing 3 different accounts. With this, you can enter a fruitful trade without having to worry about storing your securities or making the required transactions.
Additionally, you must note that you are allowed to link multiple demat accounts to one trading account, only if you are the first holder of the account. Likewise, you can link several trading accounts to one demat account with the same given condition.
Lastly, it is very important to do your homework with the different kinds of accounts, their purpose, your financial plans and the various charges being implied by different brokers. You are advised to be highly cautious of the hidden charges applied by the brokers and unwanted maintenance fees.
Trading accounts and demat accounts are both important and often function hand-in-hand for a fruitful trade. However, an individual can choose to open either of the two with a given set of limitations.
There are different types of trading and demat accounts that vary according to the needs of the investors and traders. It is very important to choose the right kind of account depending on your utility and future prospects of trade.
With the advent of technology, a lot of things have become easier to operate from. The same comfort has been witnessed in the trading and investment sector as well. Investing your money and trading in stocks are the most popular mediums to grow your wealth. Demat accounts and trading accounts are the important components of trading and investment.
What is a Demat Account?
Demat account stands for a dematerialised account and it holds all your securities in electronic form. The physical shares are converted into electronic form by the demat account. The functioning of the demat account is often equated with that of a bank account.
The way you deposit and withdraw your money in a bank account, in the same format you deposit and withdraw your securities in a demat account. You can open a demat account even if you do not have shares, that is with zero balance.
What is a Trading Account?
You can trade in the stock market only if you have a trading account. Whenever a company will list the shares in the stock market, you can trade in them only through the electronic medium for which you require a special account, this is the trading account. You open a trading account with a registered stockbroker or brokerage firm. The unique trading ID which will be assigned to you will enable you to trade in the market.
Example of Demat account and Trading account
Suppose Mohit wants to trade in shares of a specific company listed on the exchange. He will begin by placing an order for purchasing the shares through his trading account. Once the order is placed, the transaction is initiated in the exchange. When the transaction is complete, the shares are deposited in the demat account. The amount required for the trade is simultaneously deducted from the bank account linked with the trading and demat accounts.
Demat Account vs Trading Account
The demat and trading accounts are equally important and work in coordination with each other to trade shares and invest. A trading account is required for the futures and options in the share market as well as the real-time trade of the shares.
While the demat account is used for holding the securities converted to electronic form along with stocks, bonds, ETFs, etc.; the trading account on the other hand is actually responsible for the buying and selling of the shares on the stock. A trading account needs to be linked to a bank account as well as to a demat account.
Individuals can have a demat account without a trading account if they wish to just hold their securities and shares with no intention to trade them. However, it is a prerequisite to have a demat account before you open a trading account as you require it to link it with your trading account. There is an exception to this which will be explained in the following section.
What are the different types of Demat and Trading accounts?
Repatriable demat account - Funds that can be transferred abroad are known as repatriable funds and are deposited in a separate bank account which is known as Non - Resident External Account (NRE account). All the investments made from these funds is carried out through and maintained by the ‘Repatriable Demat Account’.
Non-repatriable demat account - Funds that cannot be transferred or taken abroad are deposited in Non Resident Ordinary Account (NRO account) and are known as non-repatriable funds. The ‘Non - Repatriable Demat Account’ overlooks all the transactions made through these funds and maintains them.
Equity trading account and commodity trading account - You are required to have two different accounts for trading equities and commodities. In order to trade equities, currency derivatives and futures and options you require an equity trading account.
On the other hand, in order to trade commodities, you will have to open a different ‘commodity trading account’ with your broker. The reason behind this being, commodities up till 2 years ago were overlooked by a different regulator before being merged into SEBI.
3 in 1 account - This account offers you a comprehensive plan which consists of services of demat account, savings bank account and trading account, all of them in one account. You will be trading the securities using the trading account services. The payments, receipts and other transactions will take place from the savings account feature. The securities are cleared and dematerialised in order to be stored in the demat account segment of the account.
2 in 1 account - This account aims at integrating the demat account and the trading account. This type of account is widely used and is considered as user-friendly. You can both trade and store your securities in this kind of account. This type of ‘bundled’ account is offered a majority of discount brokerages. You can link your bank account to this account to facilitate the transfer of funds.
Unbundled account - Herein, you are required to seek the services of individual accounts from different providers. In simple language, you will be dealing with a trading account, demat account and savings account separately. It would mean that you will have to get into the tedious task of linking your accounts for a smooth trade.
Can I have only a Trading account or only a Demat account?
Conventionally, it is believed that you are required to have both trading and demat accounts. However, you can choose to open either of the two but under a given set of conditions and limitations. To begin with, if you plan to invest solely in an IPO then a demat account suffices. The shares will be credited to your demat account as soon as they are allotted.
However, you need to note that you cannot sell these shares without a trading account. If you wish to only hold the shares for a longer duration then only a demat account is enough, but if you wish to sell them then you will be needing a trading account.
The second case arises when you plan to trade only in futures and options. In such a scenario, having only a trading account works and suffixes. This is because trading in futures and options do not give result to delivery for which a demat account would have been necessary. You will need a demat account along with your trading account only when you plan to hold equities.
Additionally, it is not necessarily that all transactions from your trading account will end up in delivery to the demat account. Trades of futures and options, intraday equity and currency take place through the trading account with no effect in the demat account.
On the other hand, you can buy IPOs, Gold Bonds and RBI bonds into your demat account without the required interaction of the demat-trading account.
Who should opt for an unbundled account?
Unbundled accounts are best advised for investors who wish to indulge in only storing the securities for a longer duration. You can pay to open a trading account later when you decide to sell these stored securities.
How will this help? This will help you eliminate unnecessary charges of maintaining a trading account and you will be required to pay only when you actually trade.
However, if you are a trader it is advised that you opt for bundled accounts like 2 in 1 account or 3 in 1 account. This will save the time and effort that will go into managing 3 different accounts. With this, you can enter a fruitful trade without having to worry about storing your securities or making the required transactions.
Additionally, you must note that you are allowed to link multiple demat accounts to one trading account, only if you are the first holder of the account. Likewise, you can link several trading accounts to one demat account with the same given condition.
Lastly, it is very important to do your homework with the different kinds of accounts, their purpose, your financial plans and the various charges being implied by different brokers. You are advised to be highly cautious of the hidden charges applied by the brokers and unwanted maintenance fees.
Trading accounts and demat accounts are both important and often function hand-in-hand for a fruitful trade. However, an individual can choose to open either of the two with a given set of limitations.
There are different types of trading and demat accounts that vary according to the needs of the investors and traders. It is very important to choose the right kind of account depending on your utility and future prospects of trade.
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