Before the introduction of demat account, investors used to hold their shares in the form of physical certificates.
This type of holding were cumbersome and there was a risk of losing the documents or damaging it.
The chances of fraud and fabrication were high, and it was incommodious to carry our trading with the physical certificates.
To curb such inconvenience and increase the efficiency, depositories like NSDL and CDSL introduced the concept of dematerialization.
Dematerialization is converting the physical documents into electronic form. These electronic documents are retained in demat account.
What is Demat account?
Demat account is just like your traditional bank account. However, demat accounts hold bonds, equity shares, mutual fund instead of the typical money from the bank.
It holds your securities in the electronic form and is debited or credited based on the nature of the transaction.
The Introduction of dematerialization has improved the efficiency by far greater a number and made trading and investment an easy task.
Since NSDL and CDSL regulate such accounts, it has efficiently reduced forging. People can make transactions instantly without needing to handle paperworks.
All investors are given a 16- digit unique number that act as their identity number.
How to open your demat account?
Opening a demat account is an easy job. It requires a few documents and signature to open your demat account and start investing in no time.
Here is a step-by-step guide on how to open a demat account-
Choose your DP
The first thing you need to do is find the Depository Participant. DP acts as an intermediary between the investors and depositories (NSDL/ CDSL).
You can find an online depository like IIFL or Zerodha.
Else, there are certified stockbrokers and some Indian banks as well provide such services.
Choose your depository participant wisely as your future experience will base upon their services.
Fill in the Demat Accounting Open form
Fill in your demat accounting open form and submit it to your depository participant.
The ease of digitalization offers you the ability to perform all these tasks from an online mode.
The next step is to complete the know your customer norms with your DP. you will require your Aadhaar card, identity proof, pan card and bank account statement.
After the compilation of this process, your document will be sent for verification, and you will need to sign this verified document.
Hereafter, you will receive your unique 16 digit identity number that you can use to make further transactions.
What is trading account?
Trading account is any type of account that enables you to buy and sell shares in the market.
This account is much like demat account.
Trading account was introduced after the agonizing outcry method of trading stocks.
People used to physically appear to the venue where the trading was supposed to take place and had to buy and sell shares by declaring their preferences.
Introduction of trading account curbed this painful method.
Today, traders can purchase and sell stocks instantly without any need to travel to the venues.
How to open a trading account?
The process of opening a trading account is much like that of a demat account.
You need to find a stockbroker and compare the brokerage.
Be skepticle about brokerage and services before opening an account with one.
Fill in the form provided by the stockbroker and get done your KYC.
Hereafter, your documents will be sent for verification.
Post verification, you will be allotted a unique trading account number to operate your account.
You can now trade in the stock market with your newly opened trading account.
The key difference between demat account and trading account
One major difference between these two types of account is that demat is a repertoire that is used to hold shares only while trading account is used to trade (purchase or sell) stocks.
You do not necessarily have a trading account to have a demat account and vice versa.
Trading account is measured over a period of time but demat account is measured at a point of time.
The reason is that trading is a day-to-day process while demat is used to hold securities.
Demat is a stock concept on the other hand trading is flow concept.
The bottom line
While investors choose to trade their stocks, they can also choose to retain their stocks in the form of long-term investment only.
However, a person needs a demat account to hold securities in the share market and a trading account to make transactions.
Also, stockbrokers offer investors to start their demat and trading account collectively.
This saves time and gives place for opportunity for the investors to be traders as well.
Therefore, be aware of your preferences and keep on investing and trading.