When it comes to a newbie starting their venture in the stock market, they often get confused between a trading account and a demat account. Many new investors might think that they are synonymous when in reality, they are not. A trading account and a demat account, though used to trade and invest in the stock market, serve completely distinct purposes. In order to invest confidently using a stock market trading app, you need to understand what makes a trading account and a demat account so different from each other.
What Is A Demat Account?
A demat account stands for a dematerialised account. It is the place where your shares are stored in an electronic form after you have purchased them. It converts the physical shares into electronic ones (this process is called dematerialisation) and stores them in the same place. You can easily make one on a demat account app.
A demat account can easily hold the following:
- Equity Shares
- Mutual Fund Units
- ETFs
- Bonds And Debentures
- Government Securities
- Corporate Bonds
Think of your demat account as a digital locker where you store all your shares after they are dematerialised.
What Is A Trading Account?
A trading account on a stock trading app, on the other hand, is what you use to buy and sell shares or stocks. It connects your demat account with the stock exchange you are dealing with. To understand it better, when you place an order to buy or sell a share from the market, the order gets executed with the help of your trading account. Post successful purchase of the shares, all of them are dematerialized and stored in your demat account in electronic form. Post successful sale of the specified shares, the dematerialized shares are debited from your demat account, and the sale proceeds are credited to your bank account.
Similar to how you need a shopping cart as well as a storage cupboard to ensure smooth purchase and storage of groceries, you also need to have both: a trading account (shopping cart) and a demat account (storage cupboard) for smooth purchase and storage of your shares.
Why Understanding The Difference Between a Demat And a Trading Account Matters?
It is of utmost importance to understand the difference between a demat account and a trading account before placing your first trade. This is because knowing the difference helps you:
- Avoid any confusion while placing trades
- Selecting the correct trading platform or broker
- Managing your investment portfolio much better
- Understand the movement of shares between the two
A Demat account stores your shares, whereas a trading account helps you to buy stocks and sell them. Both accounts work together to make online investing as easy as possible. Understanding their roles is your first step towards becoming a confident investor in the Indian stock market. Once you set them up, you’ll be able to buy shares online, diversify your portfolio, and take full advantage of the growing digital investing ecosystem. If you are someone who wants to start investing, then you need to have both a demat account and a trading account to get your journey started.