With the Depositories Act, 1996, demat securities have taken the place of paper-based securities in India long back. Indeed, holding and trading paper-based securities was cumbersome. Thanks to technological evolution, everything in the stock market has been moved from paper to screens. You require an online demat account along with an online trading account to access the stock markets through an online trading platform. Demat and trading accounts bring more security and transparency in trading transactions.
Why is it obligatory to have a demat and trading account?
- For trading online, in India, SEBI has mandated investors to open both accounts.
- No demat account means no entry to the stock market.
- Where a demat account is only a depository for all the securities in the electronic form and helps investors to take the equity delivery and get the allotment of IPO shares, a trading account enables you to transact on the stock exchanges.
Let us define and differentiate these accounts.
Trading account vs. Demat account
- Demat account is the account to store your shares and other securities digitally. You can manage all your securities electronically. On the other hand, a trading account is required to place trade orders on stock exchanges. You cannot place trade orders through your demat account.
- A demat account reflects all the securities you buy/sell in the stock market, whereas a trading account reflects trading flows and transactions using the trading platform.
- A trading account connects your bank account and online demat account for smoother trading online experience.
- When it comes to costs and fees, a demat account is more about demat account opening charges and maintenance charges, whereas a trading account is more about brokerage fees.
- A day trader can avoid a demat account if wish to, but no investor or trader can avoid a trading account.
- A demat account is inevitable when you want to trade on a delivery basis. On the other hand, if you are going to trade in the F&O segment only, you do not need a demat account. Your trading account is enough as F&O trades are settled in cash.
- You can store a number of securities in your demat account. It can be shares, mutual funds, IPOs, bonds, and even gold investments. But, you may require a different type of trading account as per your trading requirements. For example, Trading Account based on market segments like Equity and Derivatives trading account, and commodity trading account.
How to save demat account opening charges?
At present, you can open a free demat account with most stockbrokers, but it is a basic demat account where you can store securities of the maximum value at Rs two lakhs only. For this account, you will not be charged any account opening fee. And also, you need not pay account maintenance charges for the first year of opening account.
If your requirements increase and you have more investments than the maximum threshold, you can upgrade your account with a request form to your broker.
Other Demat Account Charges
- Annual Maintenance Charges (AMC): It is a yearly cost you need to pay to your stockbroker for their maintenance services.
- Dematerialization/Rematerialization cost: It is the fee to convert the form of securities, i.e., physical form to electronic form or vice versa.
- Off-market transfer: When you have gifted shares, and you need to transfer these shares to your demat account, the broker will charge off-market charges.
- Pledging charges: You can utilize your demat securities to pledge for a margin trading facility when you are involved in day trading. The broker will charge such charges for pledging your shares.
You can compare these charges with brokers while setting up your online demat and trading accounts.
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