Before trading, it is advisable to learn the basics. The first step is to understand the resources that facilitate trading. These are Demat accounts, trading accounts, and investment platforms. You need to understand the significance of these resources to avoid hassles as a trader.
With the emergence of online trading, there is no need to rely on intermediaries to place trades. Investors can learn how to use an investment platform and make trades themselves. Not to forget, investors cannot indulge in online trading without a 2-in-1 trading cum Demat account.
Let us learn more about the significance of Demat and trading accounts for investors.
Understanding the Basics of Trading/Investment Accounts
A trading account is essential for buying and selling financial market securities. The trade of securities occurs on stock exchanges like NSE and BSE. With a trading account, you can access financial securities available on these stock exchanges.
For instance, you buy stocks of different companies with the help of a trading account. Investors can also buy or sell derivatives, ETFs, and other instruments through a trading account. To register for online trading, you must apply for a trading account. Investors cannot ignore applying for a trading account, as it’s mandatory.
The Securities and Exchange Board of India (SEBI) has made trading accounts mandatory for investors. Some individuals believe that a trading account is only required for digital trading. Contrary to this belief, a trading account is compulsory for online and offline trading. However, the functions of online and offline trading accounts will differ. For instance, an offline trading account does not allow investors to sell securities online.
To apply for a trading account, investors rely on stockbrokers. A stockbroker is a registered firm that helps open new trading accounts. An investor can have more than one trading account if required.
Understanding the Basics of Dematerialisation/Demat Accounts
A Demat or Dematerialisation account is used to hold financial securities. Investors do not always buy or sell securities immediately. They often hold securities for a period to sell them for a profit. To hold securities for any period, investors require Demat accounts. For instance, investors buy shares of companies and wait for months and years to sell them. They hold shares until their market price rises significantly. In such a case, investors need a Demat account to hold shares. It is crucial to note that shares get stored in electronic format in a Demat account. An online Demat account will digitise all financial securities before storing them. The entire process of converting securities into digital form is called dematerialisation.
Before the launch of Demat accounts, investors used to keep physical certificates for each trade. However, there were changes of misplacement, theft and damage. To eliminate the hassle of storing physical certificates, Demat accounts were introduced in 1996. With a Demat account, there’s no need to keep physical certificates.
To open an online Demat account, investors must look for a reliable broker. They can also depend on depository participants in India, who are also authorised to open Demat accounts. You can even apply for a Demat account online via the broker’s website. Let us compare both Demat and trading accounts based on their uses.
Demat Account Vs Trading Account in India
Now that you have understood the function of Demat and trading accounts, let us compare them. The primary use of a trading account is to buy and sell securities on stock exchanges. However, a Demat account cannot do that, as it only holds securities. On the other hand, a trading account cannot hold securities in electronic format, as done by a Demat account. As you can see, both accounts have their functions for online trading. Instead of comparing trading and Demat accounts, investors must leverage their powers. In short, investors should have both trading and Demat accounts for effective trading.
You don’t have to apply for an online Demat and trading accounts separately. A reputed broker like Religare Broking Limited can help you open a Demat cum trading account for free.
Besides 2-in-1 trading accounts, 3-in-1 accounts are also available for investors. A 3-in-1 facility will have your bank, Demat, and trading account in one place. Investment experts suggest opening Demat and trading accounts with the same broker. By doing so, you can facilitate quick settlement of trades. Anything purchased via your trading account will quickly transfer to the linked Demat account.
You might not need a Demat account in some situations. For example, you don’t need a Demat account to trade futures and options contracts in India. These are financial contracts (not securities); you don’t need a Demat account to hold them. However, you cannot always invest only in financial contracts. You might need to invest in different assets like stocks, commodities, and currencies. In such a case, you need a Demat account to hold them for a period. For the same rationale, having both accounts in your name is essential for fewer hassles. Remember to consider Demat account charges before applying for one.
In a Nutshell
Instead of comparing Demat and trading accounts, it is better to use both. While a trading account is essential to make trades, a Demat account can hold securities. A reliable broking firm can help investors open both accounts and start trading. So open your 2-in-1 trading account and start trading today!
