To begin trading, you must first open a Demat account and a Trading account. Individuals seeking to trade without opening a Demat account can do so, but subject to a few constraints. The following brief aims to present an overview of how trading and Demat accounts work, with a focus on their functionality and interdependency between the two accounts.
Let us first understand the significance of a Demat account. A Demat account serves as a repository that contains shares in a digital format. All your share purchases get accumulated in the Demat account. Additionally, if you want to sell any of your holdings, they would get deducted from your Demat account.
How is a Demat account any different from a Trading account?
A Trading account enables a trade transaction to go through. It serves as an interface between an investor’s Demat account and bank account.
How can first-time investors open a Demat and Trading account?
Opening a Demat and Trading account is straightforward and can be done online. The process involves the following steps and documentation:
- Log in to the Broker’s website and look for the Demat online application link.
- Fill out the mandated KYC details. (Name, Phone number, Email ID, Address, Bank account number, and other personal information mentioned in the application form)
- Attach the required documents that substantiate your identity, residential address, and bank account details.
- Submit the application and wait for a Brokerage house representative to reach out to you through telephone or email.
The required documents comprise:
- Government-approved proof of identification (PAN, Aadhar, Passport, driver’s Licence, etc.)
- Bank account details: Copy of passbook, Cancelled cheque, etc.
- Photographs
- Any additional document(s) as mandated by the Broker
The above process can also be carried out by visiting the branch office of the brokerage house and submitting hard copies of the required documents.
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What are the charges associated with Demat and Trading accounts?
Demat and Trading accounts provide a platform for investors to take advantage of market fluctuations from anywhere quickly. However, the two accounts impose a few charges on investors, as mentioned below:
- Demat/Remat charges
These charges are incurred during dematerialization, i.e. converting physical shares into electronic form, and rematerialization, i.e. converting shares in digital mode into physical form.
- Demat annual maintenance charge
Investors holding a Demat account must make an annual payment to maintain their Demat accounts. These are the Demat account charges and comprise the costs required for maintaining your Demat account.
- Off-market transfer
Off-market transfer charges are incurred when a transaction does not involve the stock market. Let us understand this with an example. Suppose an investor wants to gift some of his holdings to a relative. There will be some specific charges levied on the transaction. Let us assume a different scenario wherein you have multiple Demat accounts and wish to transfer a portion of your portfolio into another Demat account. The charges applicable in both these cases constitute the off-market transfer costs.
- Account opening charges
You may be required to pay specific charges while opening your Demat and Trading accounts. A few stockbrokers may allow a waiver on these charges. However, you would still be required to pay the annual maintenance charge.
- Brokerage charges
Brokerage charges comprise the costs associated with each transaction that you perform. Brokerage charges can be of two types.
(i) Fixed charges – A fixed fee is levied on each transaction that does not depend on the amount of the transaction.
(ii) Variable charges – You will be charged a specific percentage of the transacted amount.
Can investors use just their Demat accounts while dealing in shares? Is it necessary to open a Trading account as well?
Investors can use just their Demat account while dealing with shares, with a few constraints. Suppose you want to hold on to your shares for the long term. Your shares continue to stay accumulated in your Demat account. Additionally, individuals seeking to invest in Initial Public Offerings (IPOs) may do so with their Demat accounts. A trading account is not required for investing in IPOs.
Moving on let us understand if investors can trade using just their trading accounts.
A Demat account essentially accumulates your shares. However, individuals seeking to trade in Futures and Options (F&O) are not required to take delivery of shares. Therefore, investors looking to trade in F&O may do so by opening a trading account without the need for a Demat account. In addition, investors seeking to trade intraday do not require a Demat account since they would close their position by the end of the trading session. However, stockbrokers may not permit investors to trade using just their trading accounts.
Investing in the stock market can lead to wealth creation or erosion. Individuals must carefully understand the various elements involved in the trading process along with the associated charges and functionalities. A thorough understanding of the stock markets enables investors to make better decisions and use their finances more efficiently. It is best if you open both trading and Demat accounts for trading in the stock market. Some specific charges are incurred while using these accounts. However, the benefits, such as being able to trade promptly and at your convenience, far outweigh the costs associated with these accounts. While a Demat and Trading account can each operate independently, it is recommended that investors open both a Demat and Trading account to ascertain a smooth trading experience.
Read also: 2022’s Guide To Invest In Stocks Market
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