What is the Difference Between Demat Account and Trading Account?

For most of the people, who are new to investing in stock trading face the confusion between a trading account and a demat account. Now, let us try to understand the basic difference between demat and trading account and what is the relationship between them.

Demat Account:

Account where you hold your shares in dematerialize form or in electronic form. It can be used only for saving of shares and not for transaction. Demat account is generally for the people who would like to invest in the market and hold the shares in the electronic form.

Once you open demat account you need to pay AMC(Annual Management Charges) charges depending on the stockbroker you are dealing with.

Trading Account:

Account used for placing buy sell orders. The main transaction of shares is done through the trading account. Trading account is mostly for traders in derivative segments such as Index, stocks, Commodities, Currencies futures and Options and specially for those who trade in Cash segment. Trading account does not attract any AMC charges.

The trading account behave like intermediary between your savings account and your Demat account.

Now let us see how demat account, savings account and trading account are related.

1) Consider, you have a Infosys stock in your demat account in electronic form.
2) Now you wish to buy HDFC Bank stock. For that first you have to transfer money from savings account to the trading account.
3) You buy HDFC Bank stock from trader or stock market.
4) You transfer money to the seller and purchases stock HDFC Bank stock
5) which then goes into the demat account.

However, if you want to sell Infosys stock then the same stock will get transferred from the demat account to the trading account. Once the sale is complete, the money earned is transferred to the savings account.

To simplify, in case you are buying shares, the trading account pulls money from your savings account and buys shares which will be then transferred to your Demat account.

While, selling shares, the trading account pulls shares from your demat account and sells them in the stock market. The money earned on it is then transferred to your savings account.