Many people assume that Demat and Trading accounts are the same, but in fact, they serve different purposes, although they are interconnected. A Trading Account is used to buy and sell securities, whereas a Demat Account serves as a repository for investments.
Typically, a Trading Account is linked with a Demat Account to facilitate trading in securities. An investor’s Trading Account connects their bank account to their Demat Account, enabling them to participate in the stock market.
How Demat and Trading Accounts Work
Demat Account Meaning: A Demat Account is an electronic storage facility for securities. It converts physical shares into electronic form, a process known as dematerialization.
A Demat Account works much like a bank account, keeping track of your securities and allowing you to buy and sell them. When you purchase securities, they are credited to your Demat Account, and when you sell them, they are debited.
Trading Account: A Trading Account enables you to buy or sell securities in the stock market. It is linked to your bank account and Demat Account.
When you invest in stocks, the funds are debited from your bank account, and the stocks are reflected in your Demat Account. When you sell these stocks using your Trading Account, they are deducted from your Demat Account and sold on the market. The proceeds from the sale are credited to your linked bank account.
The Importance of Demat Account
A Demat Account is critical for securing your electronic securities and tracking them easily. Stockbrokers must comply with many regulations, as per SEBI rules, to maintain digital securities’ compliance.
With a Demat Account, you do not need to open multiple accounts to secure various types of securities. You can keep all your bonds, stocks, mutual funds, and exchange-traded funds in a single Demat Account.
Demat Accounts also protect physical certificates from loss, theft, forgery, and damage. With online trading, you can avoid extensive paperwork and view all activities in your Demat Account on a trading app.
The Importance of Trading Account: A Trading Account uses advanced technology to provide access to multiple stock exchanges through a single platform.
With a Trading Account, you can set limits to prevent over-trading and potential losses. Your broker can provide reliable reports that help you make informed decisions when placing trades.
Overall, both Demat and Trading Accounts are essential for investing in the stock market, despite their different functions.
How to Open Demat and Trading Accounts
To open these accounts, follow these steps:
- Shortlist a few brokers who offer Demat and Trading Accounts.
- Compare their services and select a broker.
- Contact the chosen broker to open an account or fill out an online application form on their official website.
- Complete the Demat Account application and provide KYC information, along with copies of your ID and address proof.
- Undergo the verification process, which may include a video call or recorded video.
- Sign a contract outlining the responsibilities of both the investor and broker.
- Upon successful verification, the broker will provide you with unique account numbers and login credentials for both accounts, enabling you to settle trades online.
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