Trading account:
When someone tries to buy stocks, then the first requirement for him is to have a trading account. This acts like buying and selling platform. This trading account connects to a stock market, from where you buy/sell stocks. You need funds to buy stocks. Hence, you must connect your trading account with your bank account. First, you have to transfer the fund from Bank Account to Trading Account. Once the fund available in Trading Account, then one can buy stocks from the stock market. Therefore, trading account, as the name suggests, is a trading platform where you buy and sell stocks to the market.
Demat account:
When you buy something, then you must place those materials in some place. Here in the case of stock buying such storing place is called Demat Account. Whatever stocks you buy will be held in Demat Account. It is exactly like your bank locker, where you keep your valuables. Whereas, in case of Demat Account, you hold your all stocks in electronic format.
According to the Depository Act of 1996, by SEBI (Securities and Exchange Board of India), it is must for equity investors to have a Demat account, which dematerializes or converts your stocks and stores them in electronic format.
This is the reason why broking firms offer you trading account along with demat account.
How are Trading and Demat accounts interdependent on one another?
Let’s understand this with an example:
Assume on a fine Monday, you decide to buy 100 shares of SBI Bank
To buy these shares you need a trading account using which you will place the buy order.
After placing the order, if you want to hold the shares for more than a day, you need a Demat account to store those shares.
So that’s how trading and demat accounts are interconnected with each other Now you might ask, is it compulsory to have both demat and trading accounts? Well, the answer is No.Why? Find out below!
Demat vs Trading Account
The following are the difference between Demat Account and Trading The following are the difference between Demat Account and Trading Account
The demat account helps you store financial instruments like Shares, ETFs, Mutual Funds, etc. while a trading account helps you buy them.
Annual maintenance charges are applicable for demat account whereas such charges are not applicable for a trading account.
While a Demat account acts like a safe locker that helps you store shares safely, a trading account acts like an e-commerce platform where you can simply log in and start buying financial instruments
A Demat account and a trading account serve different roles in the world of investing. A Demat account holds your securities in an electronic format, much like a digital locker, whereas a trading account facilitates the buying and selling of those securities. While both are essential for stock market participation, the Demat account is about safekeeping, and the trading account is about transactions. It's crucial to ensure authenticity in both; using a fake bank statement to open either account could lead to severe legal consequences.