Investment involves a lot of activities that depends on the transaction of shares available in the stock market. To complete these transactions, one needs to be aware of the facilities that help us to store and manage our shares. The main two categories of account that are in the forerun to facilitate smooth transactions are the trading and demat account. You can get the maximum benefit from them only when you have a clear idea of its purpose. We often confuse these accounts and consider them to be the same when there is a vast difference in their usage.
The trading account can contain securities, cash and other holdings like an investment account. It happens to be a primary account for day-traders to complete their activities. It is basically an account to place orders for buying and selling of stocks in the stock market. It provides more of a digitized form of transactions which makes every concerned activity easier and faster to complete. It is mostly used by traders of derivative segments like index, stocks, commodities, currencies and options and especially for those who trade in cash segment.
The trading account is also a mandatory term that the investors must have and are differentiated from the other investment accounts in terms of their level of activity, purpose of activity and the risks involved it. Since the investors tend to buy and sell assets frequently, their primary account is subject to certain regulations to ensure its security and the speed of activities.
The demat account or dematerialized account is one that provides facilities to hold shares and securities for the investors in an electronic format. One can manage all of their investments whether it be shares, government securities, exchange-traded funds, bonds and mutual funds in one place. It is necessary to enable electronic settlements of all the trades. It is a substitution for the physical form of holding shares which can be long, tedious and have more risks involved with it.
Difference between the trading and demat account
The definitions of the accounts give us a clear picture of their differences too. The trading account is always filled with activities and needs to be constantly monitored. Its rules and regulation are to be followed to hold the account. It is primarily meant for the day-traders who make the minimum of four-day trades within a five-day week. It does not have any AMC charges associated with it. They form more like an intermediator between the savings account and the demat account. When buying the shares, it pulls money from the savings account and then transfer the shares bought into the demat account. This process is reversed when selling shares where the shares are taken from the demat account and the money received is moved to the savings account.
The demat accounts are more suited to make long-term holding of shares. It does not demand a constant flow of activities and are more like a bank. It follows strict security measures to ensure the safety of the shares and securities. One can open an account with no balance of shares but such cases are not possible in trading account.