A Demat account in simple terms means ‘Dematerialized Account’. It is a basic requirement in the stock market.
A ‘dematerialized’ account will allow the investor to hold the shares in an electronic form rather than paper form. It is much similar to our bank account where instead of money, shares/ securities are kept.
Demat & Trading account- are they the same?
Well, the answer is, ‘No’. However, to do the stock trading you have to open both accounts- the Demat account and the trading account. Also, every Demat account needs to be linked to the trading account.
Let us see the difference between the Demat and trading account.
A Demat account just holds the shares in electronic form. On the other hand, a trading account is used to place the buy or sell orders in the stock market. That is, the trading account acts as an interface between your bank account and your Demat account.
This can be better understood with an example:
Suppose if you want to buy 200 shares of a particular company having a share price of Rs10. So, you have to transfer the required amount ( in this case Rs 2000 ) from your bank account to the trading account. After that you can place the buy order for that particular share using your trading account. The shares that you buy will be kept in your Demat account.
Now, if you are selling, then the shares are taken from your Demat account and sold in the stock market, and the money will be credited to your trading account.
How to open a de-mat account?
A Demat account is opened with a depository. In India, only two depositories are operating — NSDL (National Securities and Depositories Ltd) and CDSL (Central Depositories Services Ltd) but common people cannot directly interact with these depositories.
So, an investor must open a Demat account through the Depository Participant (DP). The DP will act as the intermediary between the investors and the depository. The relationship between the depository and depository participant is governed by an agreement made between the two under the Depositories Act. As the Demat-account is opened, the DP will also open a trading account for the investor. In most cases, the DP is the stockbroker of the investor.
Here are some prominent Depository Participants in India:
1. Upstox
2. Zerodha
3. ICICI Direct
4. HDFC Securities
5. Sharekhan
