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Difference Between A Trading And Demat Account
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A lot of first time investors are confused about the difference between a trading account and demat account with many not aware that these are 2 completely different accounts and you need both to start investing in stocks. Let’s understand the purpose of each of these accounts and why you need both of them.
Trading account (Front end)
Trading account is the platform through which you place orders to purchase shares. This is the account which you open with a stock broker. Keep in mind that even when you go to a franchisee of a broker or a sub-broker, the trading account is opened between you and the stockbroker. The sub-broker (or any other middleman) is just a facilitator and forms no legal agreement with you. Unless you have a trading account with a recognized stock broker, you will not be able to purchase shares.
Demat Account (Back end)
Think of the demat account as a depository or a bank locker where your purchased shares are kept. Unless, you are a day trader or a future and options trader (who do not buy any shares for more than a day, i.e. they square off their positions before the end of the trading day), you will need this account to store your shares. Earlier, investors held share certificates and could own shares even without having a demat account. While that is still allowed, these days it is much better to have a demat account. It is easy to operate and stores your shares in an electronic form. So no worrying of loosing share certificates, plus it gives you the ability to buy and sell shares at the press of a button with no paperwork.
A demat account has to be opened with a recognized depository participant. A stock broker may or may not be a depository participant. These days’ most big banks (such as HDFC, Axis, ICICI, SBI etc.) have registered themselves as a depository participant and as a stockbroker (through different subsidiary companies). Accordingly, they are in a position to provide you with a 3-in-1 account (i.e. what they do is to link your trading-demat-bank account with each other).
How should you proceed?
If you are a heavy volume trader (i.e. someone who trades on a daily basis) implementing complex option trading strategies, then you may find it cheaper to open your trading and demat account with a standalone discount brokerage company since their brokerage charges are significantly cheaper compared to those offered by large commercial banks.
On the other hand, if you are someone who believes in long term investing and do not trade frequently, then opening your 3-in-1 account with a large commercial bank should be the preferred way of starting with stock investing, as it enables ease of money transfers and helps you simplify life by organizing all your accounts in one place.
Of course, no one approach is better than the other in terms of helping you succeed in the stock markets. Accounts are just the starting point. Succeeding as a trader or being able to spot the best stocks for long term has more to do with learning, knowledge and self discipline.
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