What is the difference between a demat and a trading account?

Trading account

A trading account is used to purchase and sell shares and other securities. Trading account works in tandem with a demat account. The shares that investors buy using their trading account are stored in the demat account. Both the demat and trading accounts have a unique number and without them, investors cannot trade in the stock markets.

Demat account 

In a demat account, investors can store their shares, bonds, government securities and mutual funds in electronic form in one place, reducing the risk of theft or damage. Just like how a bank account is used to store money or cash.

During the online trading, shares are bought and held in a demat account. Similarly, when shares are sold they move out of the seller’s demat account to the new buyer’s account electronically.

It was introduced by the National Stock Exchange (NSE) in 1996. Since the start of the pandemic in 2020, there has been a stupendous rise in the number of demat account openings as technology has helped investors to open accounts within a few minutes.

The difference

The demat account of investors will show their current holdings in shares and securities. While the trading account will show the transaction that investors have carried out in the stock market. Having a trading account means having the ease and flexibility to trade through various stock exchanges and transfer the funds and equities in a hassle-free manner.

While investors can open a demat account without buying any share or security, and it's not necessary to maintain balance in it. However, in a trading account investors are required to transfer the funds to and from the bank account to buy and sell various securities.

Can investors have a trading account without a demat account?

Usually both the demat and trading account are opened together by the broker. Depository firms CDSL and NSDL maintain the demat accounts of millions of investors. Investors need to have a demat account to open a trading account. Both these accounts are necessary to trade in the stock market. This is because shares are available only in an electronic format. So, whenever an investor makes a trade, the shares will require a demat account as a place to store the shares.

However, not all trading account transactions will result in delivery into the demat account. For example, intraday equity trades, futures trades, options trades, and currency trades are executed in investors trading accounts, but they do not impact their demat account.