Understanding demat and trading accounts: Their differences and functions
Demat and trading accounts are two separate but interconnected entities that play vital roles in the purchase, sale, and holding of securities such as shares and exchange-traded funds (ETFs). A demat account, short for dematerialized account, is similar to a bank locker, storing your shares in an electronic format. Conversely, a trading account operates like your bank account, enabling the buying and selling of shares on stock markets.
The unique roles of demat and trading accounts
While both accounts have unique numbers and can be operated online, they serve different purposes. The demat account converts your shares from physical form to electronic format, capable of holding various securities including shares, bonds, debentures, mutual funds, and ETFs among others. In contrast, the trading account is used for transacting in the stock markets, facilitating the buying or selling of shares or other forms of securities.
The interplay between both accounts
The functioning of demat and trading accounts is closely intertwined. Since a demat account solely holds your securities and isn't used for transactions, it becomes ineffective without a trading account. You should first open a trading account to buy and sell securities, and then a demat account to store them until redemption. It's advisable to have both the demat and trading accounts with the same Depository Participant (DP) for seamless trading.
A demat account also has additional uses
A demat account is necessary if you wish to subscribe to an initial public offering (IPO) of a company. This account can also be used as collateral for availing loans. Interestingly, unlike a bank locker that stores valuables, a demat account can be opened with zero balance and can remain empty with no shares in it.
