When considering investing in stock trading, the need for having a trading and a Demat account comes into the equation. For those who are relatively new to investing in stocks, the most frequent queries are about why is therea needto have both these accounts and what is the relationship between them. Well, the difference will be evident soon enough.
The age of maintaining your stock portfolio is a thing of the past. The Depository Act of 1996 by SEBI (Securities and Exchange Board of India) mandates equity investors to have a Demat account which dematerializes or converts your shares and stores them in electronic form. Now, whenever you go in to open a Demat account, the Bank (or any other Depository Participant) will offer to open a Trading Account for you as well.
You can only store or rematerialize (convert back from electronic to physical form) securities in your Demat account. For buying and selling shares, you need to have a Trading account. In other words, a Demat account is like a storage facility while a Trading Account is the transacting medium to buy and sell shares.
Now in a scenario where you have a significant units of shares of different scrips (shares of a particular company) but does not feel the need to get into stock trading, you may feel that having a trading account might not be required. What needs to be clear here is thatas of now, a Trading account is the only medium through which you will be able to sell the shares that you are holding in a Demat account.Since the process of opening a trading account is simple, you caneasilyunderstand how to operateyour own account and even learn to plan to trade shares in the near future.
How the trading processes functions?
The trading account is the intermediary between your Bank account and your Demat account when buying and selling shares in the share market and is handled by the Depository Participant or the stockbroker that you have chosen.
For buying shares, the Trading account takes money from your Bank account and buys shares which are then transferred to your Demat account.
For selling shares, the Trading account takes shares from the Demat account and sells them in the stock market. The capital generated is then sent to your Bank account.
The right choice of Demat + Trading Account
Different investors have different levels of knowledge and risk appetites so it is important to be smart while opening a Demat and the accompanying Trading account. The important factors to consider are –
Account opening and maintenance charges
Make sure to check these charges if your trading activities would be few and far in between, and also look for reviews on the quality of services provided by a Depository Participant.
Intraday Trade Charges
These charges are applied on every trade you make where both buy and sell transactions take place on the same day. For e.g. – Broker 1 may charge 10 paise for every 100/- INR of shares traded while a second broker charges 20paise for the same trade value.
Delivery Trade charges – These charges are applied on trades where you buy shares on one day and sell those after a day or even a month or even hold them for a longer duration depending on your own preference. These charges are comparatively higher than intraday charges and generally range between 0.2-0.4% per trade.
These include Demat and Remat charges, loan pledge, account freezing, ad-hoc statements, options trading, failed transactions as well as charges for facilities like SPEED-e or Easi (for electronic instructions).
Having your Demat account with one Depository Participant and Trading Account with a separate one might not be too big a problem as your stockbroker can easily link both these accounts. However, having your Demat and Trading account with a single Depository Participant has added benefits as Trading accounts are generally opened for free when you open a Demat account with a Bank, but opening them separately might have a charge involved. In addition, the annual maintenance charges can also be waived off depending on your trading activity and the amount of securities held. Another major advantage is the reduction in paperwork and quicker fund transfers for trading.
And in case the two DPs do not have a partnering agreement, then you would need to open a new Trading account with the DP where the majority of your securities are held.
Sticking with a Demat account
If you intend to shift your shares from an older Demat account to a newer one, there is a transfer charge per share involved. And if the number of share units is high, you might end up shelling a significant fee for transferring your shares.
So, it is important that you carefully scrutinize all the available options before deciding on a particular Demat and Trading account.
It is necessary to understand each and every aspect when it comes to stock trading. Now that we have understood the relationship between demat & a trading account