It creates confusion for many people when the terms trading account and demat account are used interchangeably. While trading account and demat account are very closely related to each other, there is a lot of difference in their role as well. The most important thing in both of these is that you buy/sell shares in the secondary market through trading account and its effect i.e. debit or credit of securities is reflected in the demat account. Let us find out how these two are different from each other in the end.
Trading account is a flow whereas demat account is a stock
Transactions take place in the trading account but securities appear as debits or credits in the demat account. Trading account is the record of transactions of buying and selling of shares and it is the trading account where you execute your trades on the stock exchange. Demat account cannot execute transactions in the open market. That’s why, even if you don’t need a trading account to apply for an IPO, you still need a trading account to sell the shares allotted to you in the IPO.
The main difference between the two is ownership
Demat account comes in handy when ownership of assets is involved. The main difference between a trading account and a demat account is ownership. Only assets or securities owned by you can come into the demat account. This is why intraday trades and F&O trades are reflected in the trading account, but are not reflected in the demat account. Intraday trades or futures and options transactions do not create ownership. They simply create transactions that allow you to participate in the rise or fall of the price. Then there are others like bonds, RBI bonds and mutual funds, where you can buy and sell from a demat account without using a trading account.
Demat account is necessary for IPO, not trading account.
You can apply for IPO through demat account without trading account. When you apply for an IPO, you need a demat account as the allotment of shares will be done only through demat credit as physical share allotment is no longer allowed. According to SBI Securities, although you do not need a trading account to invest in IPOs, it is only a part of it. After getting allotment in IPO, if the shares are listed at a premium of 70% and you want to sell the shares, you need a trading account.
You can get allotment in IPO and keep them in your demat account. However, to sell these shares, you still need a trading account. This is why a trading account cum demat account makes a lot of sense for investors. Selling directly from a demat account is not allowed, so on the day you choose to sell IPO shares, you need a trading account.
Is demat account necessary for F&O intraday trading?
There are times when you do not need a trading account. If you want to hold only RBI bonds in your demat account, then there is no need for a trading account. In this case, just having a demat account is enough. Similarly, if you have gifted or inherited shares and do not want to sell them, a demat account is sufficient, no trading account is required.
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