What is trading account and Demat account?
In order to invest in securities markets, an investor needs three different accounts: (1) a bank account, (2) a trading account, and (3) a demat account.
While most people are familiar with a bank account, the other two are less familiar.
Trading account
This is an account one holds with a stock broker who is a member of a recognized stock exchange. This account is required to carry out buy or sell transactions in the securities markets. A stock broker, being a member of the stock exchange, is registered with and regulated by the exchange.
While facilitating the transactions, the broker charges a brokerage commission, which is capped as per SEBI regulations.
Demat account
A demat account is one where securities are kept in electronic format. Consider this the equivalent of a bank account. While we hold money in the bank account, securities are held in the demat account.
This is an account one holds with a stock broker who is a member of a recognized stock exchange. This account is required to carry out buy or sell transactions in the securities markets. A stock broker, being a member of the stock exchange, is registered with and regulated by the exchange.
While facilitating the transactions, the broker charges a brokerage commission, which is capped as per SEBI regulations.
There are two depositories in India that appoint depository participants with whom an investor can hold a demat account. Once again, taking the banking analogy, a depository is like the head office of a bank, while the depository participant (DP) is akin to the branch of the bank. The depository holds securities on behalf of the investor.
The demat process has eliminated all the risks that used to be associated with paper-based securities until the mid-to-late-1990s.
The bank account, demat account, and trading account could be linked. However, at least one bank account must be linked to the demat account as well as the trading account.
Basic Services Demat Account (BSDA)
In order to include individuals with small investments, there is a facility called the Basic Services Demat Account. The individual can have only one account with a total value of less than Rs. 2 lacs each for debt securities and non-debt securities. The annual maintenance charges (AMC) are extremely low for such accounts.
