What is Trading & Demat Acounts?
Last Updated: Dec - 21- 2019
This is one question people new to investing gets confused. Through this article, we like to help them in knowing what is Demat & Trading account? and also Benefits and importance of Demat & Trading account?
Demat Account is the account that holds shares in electronic or dematerialized form. To make it easier to understand, Similar to a bank account which holds money, deposits etc, A demat account is used to hold financial instruments like shares, bonds, government securities, mutual funds and exchange-traded funds (ETFs) in electronic form.
Before the Demat system is introduced, all shares transactions used to happen in physical form. That was a complicated and slow process of share transfer. After the introduction of Depository Act in 1996, investors can able to hold securities in electronic form in their demat accounts which are more efficient and secure.
At present, there are only two depositaries offering DEMAT account services in India. They are The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). There is virtually no difference between the two and both of them operate under strict SEBI regulations.
You cannot directly walk into either of this depositories. You need to liaison with a Depository Participant (DP) which acts as an agent to the depository. Banks, Non-Banking Financial Companies (NBFC) and Stock Brokers act as Depository Participants. Needless to say, even the DP is governed by the regulations laid out by the SEBI.
According to the Depository Act of 1996, by SEBI (Securities and Exchange Board of India), it is a must for equity investors to have a Demat account. Hence the first step to invest or trade in equities or stock market is to open a Demat account.
BENEFITS OF DEMAT ACCOUNT-
There are several benefits associated with the Demat system
- It is a safe, easy and convenient way to hold securities.
- It ensures immediate transfer of securities.
- There is no stamp duty on transfer of securities.
- Risks associated with physical certificates such as bad delivery, fake securities, delays, thefts, etc. are eliminated.
- There is a major reduction in paperwork involved in transfer of securities, and reduction in transaction cost, etc.
- No odd lot problem exists; even one share can be sold.
- Provided more liquidity to market as it has attracted many more retail investors towards the market.
- Change in address recorded with DP and gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
- Automatic credit into demat account of shares; arising out of bonus/split/consolidation/merger etc. can take place.
- Holding investments in equity and debt instruments in a single account is possible.
Trading Account is an account that enables an individual or other parties to buy and sell securities. To make it easier to understand, Trading accounts act like a buying and selling platform provided by the stockbroker for performing transactions in the stock market.
In order to trade with the trading account, a customer has to transfer funds from the Bank Account, post which he can use these funds to buy and sell securities online through the exchange.
Once you buy or sell Securities, they are either deposited in or debited from your Demat account. In Short, Trading Account is an intermediary of the Stock Market, Bank Account, and Demat Account.
BENEFITS OF TRADING ACCOUNT-
Following are the benefits associated with the trading account
- Traders can access their online trading accounts from anywhere, at any point in time.
- Provides information about the Stocks. (Open, High, Low, Prev. Close, Volume etc..)
- Trading account helps to know gross profit or loss.