Difference between a trading account and a demat account.
If you, as a trader, want to buy and sell equities then you need a trading account
and a demat account. Many investors tend to confuse between a trading account and
a demat account. That is more because you tend to open a trading account and a demat
account simultaneously. Brokers refer to this as a 2-in-1 account where the trading
account and the demat account are opened simultaneously. Here are some basics you
need to understand about the trading account and the demat account.
What you need to know about a trading account?
A trading account is a flow book. That means your transactions are executed in the
trading account. Whether you are buying shares or selling shares, it has to be done
through your trading account opened with the broker. In the trading account, when
you place an order to buy or sell, it first gets reflected in the order book. You
can either place a limit order or a market order. Normally, market orders will get
executed immediately but limit orders are executed only when the price condition
is met. An order placed in the trading account can be cancelled as long as it remains
in the order book. Once the order is executed, then the details of the trade mentioning
the quantity and the price go into the trade book. In your trading account, the
trade book is the record of all your transactions executed during the day. The trading
account can be used to buy or sell equities, F&O, bonds and ETFs. In case you only
want to trade in futures & options (F&O), then you do not require a demat account
and only trading account will suffice.
What you need to know about a demat account?
While the trading account is a flow book, the Demat Account is a stock book. It
records all the shares and other securities that you own. It is a statement of ownership.
While Trading Account is reviewed over a period of time, the Demat Account is normally
reviewed at a point of time. Since Demat account is a statement of ownership, any
sale of shares will be debited to the demat account and any purchase of shares will
be credited to the demat account. Demat account also directly receives the effect
of corporate actions like stock splits and bonus issues. Dividends on shares held
in your demat account are directly credited to your designated bank account.
How does the trading account interplay with the demat account?
Trading account and demat account constitute 2 key pillars of your participation
in equity markets. When you buy shares and the trade is confirmed, these shares
get credited to your demat account on the T+2 day. T+2 refer to 2 trading days after
the date of transaction (excluding trading holidays). When you sell shares in your
trading account, the shares get debited on T+1 day. In an online trading account,
the execution of trade and the debt/credit to demat is seamless. In offline trading,
when you sell shares, you need to sign a Debit Instruction Slip (DIS) and hand over
to your broker on the same day. If you want to participate in the markets, having
a trading account and demat account is a must. That is where you journey into the
world of equities begins!