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Differences between demat and trading account

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Differences between demat and trading account

What is demat and trading account?

The basic difference between demat and trading account is that the demat account is a stock while trading account is a flow. The trading account is used to execute buy and sell transactions in the stock markets. The demat account, on the other hand, holds securities that signify ownership. So a demat account can hold equity shares, ETFs, mutual funds, government bonds, gold bonds, Fixed Deposits etc. However, futures and options being contracts, are held in the trading account and not in the demat account. Similarly intraday trades do not impact the demat account since the net position at the end of the day is zero in these trades.

What is the difference between demat account and trading account?

There are some basic points of difference between a demat account and a trading account:

  • When you buy shares in the trading account, the same shares are actually held in the demat account. The demat account is therefore ownership account while the trading account is a transaction account.
  • Trading account is always evaluated over a period of time while the demat account is evaluated at a point of time. That is because the trading account is a flow while the demat account is a stock.
  • When shares are purchased in the trading account, they are credited to the demat account on T+2 day. At the same time, when shares are sold in the trading account, they are debited to your demat account on or before T+2 day. The relationship between the trading and demat account is built through the Debit Instruction Slip (DIS). Alternatively, you can also execute a Power of Attorney agreement with your broker to seamlessly debit and credit your demat account.
  • Securities purchased from secondary market through trading account are directly credited to the demat account. However, demat account can also receive credits from other than the above.  For example, purchase of IPOs, bonds, mutual funds, corporate actions etc are not executed in the trading account but are directly credited to the demat account.

Can one have a trading account without a demat account?

In case you only wish to trade in futures and options, then you do not require a demat account as trading account alone will suffice. However, in case of cash market transactions (even if it be intraday) demat account is a must as per SEBI regulations.

Is it permissible to have a demat account without a trading account?

That is also possible. In case you want to receive shares as a gift from your relative or if you want to apply for an IPO, then demat account alone is sufficient. However, in case you want to sell these shares, then trading account is a must.

Corporate actions like dividends, bonus, splits etc are only executed on the demat account and not on the trading account.

Online trading account opening steps

The basic process for opening an online trading account is the same as any normal trading account. However, there are a few additional processes that you need to keep in mind for online trading account:

  • While filling up the account opening form, specifically tick on the online trading account activation box so that it is opened simultaneously.
  • Ensure that you sign a power of attorney agreement with your broker for automatic debits to your demat account. This will save you the hassles of giving DIS each time you sell shares from the demat account.
  • Once the online trading account is activated, the user name and password is sent to you securely. You can login to your trading account by using the user name and password. You will be asked to change your password immediately before putting trades.
  • Before you start trading ensure some basic security measures that the online trading site opens in https:// format only. Ensure that your computer / mobile are secured from virus and malware so that your trading account does not get compromised at any point of time.
  • Once these basic issues are in place, you will have to fund the account. You can fund the account via online bank transfer (Payment gateway/NEFT/RTGS/IMPS), UPI and DD/Cheque. Ensure that all such transactions are only made from the bank account mapped to the trading account.

How to trade using demat account?

Technically, you cannot directly execute transactions in your demat account. Transactions can only be executed in the trading account and the ownership is automatically recorded in the demat account mapped to the trading account. Direct selling from demat is not permitted, although account to account transfers are permitted.

Can you transfer shares using demat account?

There are two types of transfers that are done from the demat account. Firstly, there is the routine market-transfer that is done when you buy or sell shares in the trading account. The demat account gets debited or credited accordingly. Secondly, there is an off-market transaction wherein you can transfer shares from one demat account to another demat account. You need to fill up the DIS and specifically mention that it is an “Off Market Transfer” with target DP ID. The shares are automatically transferred.

Are there capital gains implications in an off market transfer?

It depends on whether the transfer is to a relative or not. In case the transfer is to your own demat account with another DP or to a relative (as defined in the Income Tax Act), there is no incidence of capital gains tax. All other transfers attract capital gains tax at the extant rates.

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