If you want to open a demat account, then terms like a demat account and a trading account may seem a bit intimidating to you. However, in reality, these terms are really simple to understand. Besides, a demat and a trading account are essential to be successful in the share market. But, before we dig deeper, we should understand what a demat and a trading account is.
What is a demat account?
‘Demat’ is the short form of ‘demateralisation’. A demat account holds the investments (stocks, mutual funds, exchange-traded funds, derivatives, etc.) of a person in an electronic format. Think of it as an electronic repository, which has all your investments.
The concept of demat account was introduced in India in 1996 by the National Securities Depository Limited (NSDL). It allows millions of investors to store their investments electronically, without worrying about paper certificates.
What is a trading account?
The purpose of a trading account is to facilitate buying and selling of shares and other securities. If you have a trading account, it must be linked to your bank account. In case you want to buy a share, you will have to transfer the funds from your bank account to your trading account and then you will be able to buy a share.
Similarly, when you sell a share, the sales proceeds are first sent to your trading account. From your trading account, the proceeds can be transferred to your bank account. In simple words, a trading account is an important link between your demat account and your bank account.
To understand why a demat and trading account is essential to succeed in the share market, we need to understand their benefits.
Benefits of having a demat and a trading account for investors
- Eliminates paper certificates totally: A demat account ensures that you do not have to deal with paper certificates at all. This reduces your work significantly as an investor. Buying and selling shares through a demat and a trading account is almost as seamless as transferring money online from one bank account to another. Just as you do not have to look at currency notes in netbanking transactions, you do not have to worry about paper certificates of shares thanks to demat and trading accounts.
- Seamless trading: A trading account allows you to buy and sell shares seamlessly. Compared to this, earlier, you had to first arrange the paper certificate and then call up your broker to execute a transaction. Nowadays, thanks to stock trading apps, you can buy and sell securities using your mobile phone on-the-go.
- Less risky: In older days, before the advent of dematerialisation, investors used to face issues related to the theft of their share certificates or damage to their certificates. This used to make stock trading risky. But in the case of a demat account, as you hold shares electronically, there is no risk of theft or damage to share certificates. All you need is your laptop/mobile phone and you can access all your investments with a few clicks.
- Access to reports and insights: Many stockbrokers offer amazing reports and insights related to the share market on the trading accounts of investors. If you have a trading account, all you need to do is log into it and you will be able to read several stock market-related reports and analytics, which will help you make decisions related to your investments. Before demat and trading accounts were introduced, investors had to call their stockbrokers to get such insights.
- Ability to invest in different kinds of securities: You can invest in multiple kinds of securities with just one demat and trading account. With just a few clicks, you can invest in shares, mutual funds, exchange-traded funds, derivatives, debentures, and bonds. When dematerialisation was not introduced, investing in multiple securities meant making several phone calls and dealing with a lot of paper-work. Demat and trading accounts have done away with all those hassles.
Conclusion
In this day and age, you are set to invest in the share market as soon as you open a demat account and a trading account. While no one can deny the benefits of a demat and a trading account, you should understand that these accounts are only a medium to make investments. You should make investments only after doing thorough research. In other words, you should not make investments just because it is convenient to do so.
