Do you have a bank account? Mostly, you’d say yes. Some of you even hold multiple bank accounts. Only thing is, instead of money held in your bank account the Demat account hold shares/bonds etc. and a trading account is an account held by a broker who enables investors to buy/sell these shares.
If you wish to invest in the stock market, you must have a clear conception about these. So, here’s everything you need to know about the Demat account and Trading account.
- What is Trading account?
- What is Demat account?
- Demat account benefits.
- How Trading and Demat account works in share trading?
- How Demat account works? [Buy/Sell orders]
- How to open a Demat account? [Step by step]
- Documents required for opening the Demat account and Trading account
- Share Transfer Using Demat Account
- Demat account vs. Trading account
- Why do you need to choose a suitable Demat account at the beginning?
- List of major Demat Account Charges [account opening charges, brokerage, website link]
Please go through this all in 1 guide. It will provide you a complete concept about the Demat account and Trading account.
What is Trading account?
Trading account is very similar to a bank account that provides a common electronic platform to buy or sell shares/ securities/bonds.
To conduct online transactions in the stock market, you have to register with stock-exchange. Therefore, you need to open an account with any stock broker or firm that trade on your behalf in the stock market. Each trading account comes with a unique trading ID which is used for conducting all transactions.
What is Demat account?
Demat account is short for Dematerialised account. DEMAT account is a platform that allows investors to hold shares/securities in an electronic format. Stocks in Demat account placed in the dematerialized form. This is similar to a bank account where you hold your money and respective transactions in bank passbook. So, the Demat account holds the details of financial transactions for shares, securities, bonds, mutual funds etc. in electronic form.
So, with that definition let me explain little more. Firstly, you need a Demat account if and only if you are willing to deal in Shares that too taking the delivery or holding the shares for (T+1) day. Therefore, if you want to invest in the stock market then you need a Demat account. BUT if you are planning only for intraday or day trading; you don’t need a Demat account. You only need the Trading Account.
Most of the banks (HDFC Bank, ICICI Bank, AXIS Bank etc.) and other brokers like Angel broking, Zerodha, Religare, Sharekhan, Samco etc. are depository participants who open a Demat account with depositories on your behalf. Also, you can you can nominate this accounts to anyone similar to a savings account.
Demat Account Benefits
Right now we will discuss the benefits of Demat Account in respect to the shareholder, the shareholding company, and the brokers one by one.
Benefits to the Shareholder:
- It is an easy and convenient way to hold securities
- It provides Immediate transfer of securities
- No stamp duty needed on the transfer of securities
- Safer than paper-shares. It avoids earlier risks associated with physical certificates, fake securities, delays, thefts etc.
- Reduced paperwork for share transaction
- Reduced unnecessary transaction cost
- Change in any personal information recorded with a Depository Participant (DP), automatically registered with all companies in which investor holds securities. It eliminates the corresponding modification time with each of the shareholding companies separately.
- Depository participant regulates all type of transmission of securities. Therefore, it eliminates the need for resources for notifying companies.
- Dividends, Share splits, Bonus etc. credited automatically to the Demat account.
- A single Demat account can hold investments in both equity and debt instruments.
- Traders can work from anywhere even from home.
Benefits to the Company
- Demat account and the depository system reduces the effective cost of new issues due to lower printing and distribution costs.
- It also increases the efficiency and provides better facilities for communication
- Most importantly, provide timely service to the shareholders and investors.
Benefits to the Brokers
- Demat account reduces the risks of delayed settlement.
- Ensures more profit due to an increase in the volume of trading.
- Eliminates chances of bad delivery or forgery in the share transaction.
- Increases overall trading and profitability.
- Encourage new people to invest in the share market and increases the confidence of existing investors.
How Demat account and Trading account works in share trading?
Read also:Depositories in Indian Stock Market
An online Trading Account consists of a Trading account, a Demat account, and a Bank Account.
In order to trade with the trading account, you need to transfer funds from the bank account, place buy or sell orders online through the exchange using this funds. Whereas Demat account is considered as a bank where shares bought are deposited in and shares sold are taken from.
How to open a share trading account?
Actually, a Trading account acts as a connector between the investor, bank account, Demat account and the stock market.
How Demat account works? [Buy/Sell orders]
Let’s have an example. Suppose you already have shares of Company A and now you wish to buy some share of Company B. As you need money to purchase something, so, first you need to transfer an adequate amount of money from your bank account to your trading account. Now you can place a buy order for the share of Company B from your trading account.
Next, the stock exchange will process your order. Along with this stock exchange will verify the details of the transaction, the current market price and availability of the shares in the market. Stock exchange also will check the details of your Demat account that is linked to your Trading account.
Once the order is processed the share of Company B will be added in your Demat account. Hence, you have shares of Company A as well as Company B both listed in your Demat account.
Similarly, if you want to sell the share of Company A from your Demat account then you have to place a sell order from your trading account. In a very same way, stock exchange will verify details of the transaction along with the details of your Demat account that is linked to your Trading account.
After execution, a share of Company A will be deducted from your Demat account and the sell value you earned will be deposited into your Trading account. So, if you wish you can transfer that amount into your bank account as well.
How to open a Demat account? [Step by Step]
- Step1: Find a broker or firm. Ensure that the broker/firm is registered with the Securities & Exchange Board of India (SEBI).
- Step2: Compare brokerage rates and facilities provided by them. Also, ensure that the broker will take your orders in a timely manner. Time is of utmost importance in the stock market. Within a few seconds, the stock price can change. So, make sure that you select a good broker.
- Step3: Some give discounts on the basis of the number of trades conducted. It is important to understand all the dealing facilities before opening an account. But don’t worry, all the leading broking firms provide 24X7 customers care services for any issue.
- Step4: Next, asked the broker/firm about the account opening procedure. To complete the KYC part you either can visit the broker’s office physically or can ask the broker to send its representative to their house along with the account opening form and the Know Your Client (KYC) form.
- Step5: Fill these two forms up. Submit along with two documents that are proof of your identity and address.
- Step6: After verification, they will activate your account and will provide you with a unique trading ID which you can use to conduct all transactions.
So, now you are ready to place your buy/sell order. Yooohoo……
Documents required opening a Demat account and Trading account
Proof of identity and proof of address is required to open share trading account (Demat account + Trading Account) with any stockbroker. They also need details of your bank a/c. So if you are going to open a share trading account then carry the following documents.
- PAN card
- Driving license or Passport or Voters Id
- A cheque to make payments and verify your bank details. But, if you are not going to make any payments, then carry a canceled cheque only.
- Bank passbook with updated account statement of latest few months.
- A number of photocopies of each document will be required. All the photocopies must be self-attested.
Original documents may require for verification later. Some broker can do it online for you. Is not great!
This is just a basic list. But we will recommend you to talk to your broker in the beginning and asked for detail information about account opening.
Share Transfer Using Demat Account
Yes, the nomination is possible in Demat account. You can have a nominee of your choice. At the time of filling up the account opening form, you can put the nominee details. This step will enable the nominee to receive the securities after the death of the current shareholder of that Demat account.
Transfer of shares is possible between different Demat accounts held with different Depository participants. So, for transferring your shares from one Demat account to another Demat account you need to fill the Delivery Instruction Slip Book (DIS) and submit the same to your DP.
However, do not forget to check whether the central depositories are the same or not (CDSL or NSDL). But, if both of them are different, then you need an INTER-Depository Instruction Slip (Inter DIS). Again, if they are same, then fill up an INTRA Depository Instruction Slip (Intra DIS).
Always try to submit that DIS when the stock market is on. So, the date of submission of DIS and date of execution of DIS will be the same date. Otherwise, there may be a delay. Here, you may also need to pay the broker some charges for this transfer.
Demat account vs. Trading account
A trading account is used to place buy or sell orders for shares in the stock market. On the other hand, the Demat account is used as a bank. In Demat account shares bought are deposited in and shares sold are taken from.
Why do you need to choose a suitable Demat account at the beginning?
The Demat account charges vary from one brokerage firm to another. At the time of any share transaction, every investor is required to pay brokerage along with other charges (i.e. taxes and fees imposed by SEBI and state/central government like STT, transaction charge, and SEBI charges) for each transaction in the DA.
The percentage of the amount of brokerage varies depending on the organization and its type of services. Therefore, before opening a Demat account you must check the Demat account charges and services offered by them. Again, many brokerage firms open a DA without any opening charges these days. However, they charge brokerage charges or operation fees. Most of the government charges remain the same. But the different creates the brokerage charged by each broker.
There are two types of stock brokers in India:
- Full-service broker (Traditional broker), and another is –
- Discount broker (Budget broker)
Full-service brokers provide trading, research, the advisory facility for stocks, commodities, and currency. On the other hand, Discount brokers provide necessary trading facilities but no advisory in the least possible cost in stocks, commodities, currency, and derivatives. As a result, they become the budget brokers in India.
So, the brokerage we pay can make a big difference in the return. Most of the time, it is difficult to change a broker once you have start investment. So it becomes mandatory to do proper research before opening the Demat account.
List of major Demat Account Charges
We have listed the latest account opening charges and brokerage charges for all the major brokers in India. We have divided the list into two parts. One is for the Discount brokers and the other for the Full-service brokers. Hope, it will be helpful for you.
Major Discount Brokers in India
Major Full Service Brokers in India
So, let choose a suitable broker and open a Demat account to start investing in Indian stock market. Wish you a happy investing.
Please leave your queries in the comment section and let us know your views regarding this article. If you need any other information regarding Demat account and trading account, please let me know. I will try my best to solve your quires.