Know the Difference: Trading Versus Demat Accounts

A demat account holds up or stores the shares and securities (mutual fund units, bonds, government securities, exchange-traded funds, etc) in a dematerialised (electronic) format, while a trading account is used to buy and sell shares and securities in the stock market. 

While the functions are different, demand account and trading account are closely related. The function of a demat account is like a savings account of a bank. As a savings account holds money, a demat account allows investors to store securities in electronic form which are debited and credited accordingly. On the other hand, a trading account works as a current bank account. Demat and trading accounts are linked to the bank account to conduct the actual stock market activity.

Ideally, an investor needs three accounts to start trading in share markets: bank, demat and trading. When an investor initiates the process of buying a share using the trading account, the money gets debited directly from the linked bank account, and the shares are subsequently transferred to the demat account for storage thereof. Similarly, during the selling of shares, the shares are taken from the demat account and are sold in the stock market, the money so obtained is credited to the linked bank account. 

Demat account is a record of ownership of securities, it is measured at the end of the financial year on March 31. A trading account captures transactions over a period, its measurement is possible over a period (three months, six months, one year, etc). 

As such, there is no condition to open both demat and trading accounts. An investor can easily have a demat account without a trading account or vice-versa. For instance, for trading only in futures and options, there is no need to open a demat account. It is only for trading in equities that one requires to have both trading and demat accounts.