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For beginners, stock markets and stock trading can be a steep learning curve. However, it’s not rocket science and the workings of the stock markets can certainly be mastered with practice and patience. People are usually attracted to stock trading, as it offers significant earning potential. To ensure the best possible returns from stock investments, beginners first need to know the terminology and the things they need to start stock trading. Let’s begin with the basics and try to understand ‘what is a Demat account’.
What is a Demat account?
A Demat account is where all your financial instruments are kept in electronic form. A Demat account is like a wallet for all your investments such as shares, mutual funds, government securities, bonds, and exchange traded funds (ETFs). Around two decades back, all financial instruments were traded in physical form. However, with technology advancements, financial instruments began to be stored and traded in their electronic form. The process of dematerialization of financial instruments was launched in 1996 and it has transformed the way the stock markets function. As of now, stocks are traded at super high speeds and every second matters, in terms of booking profits and avoiding losses. The reliability and accuracy of transactions has also improved with dematerialization. It is important to note that there is a difference between demat and trading account, which we will discuss later. For now, let’s focus on the working of a Demat account.
How a Demat account works?
There are two primary entities involved in the functioning of demat accounts. One is the Central Depository that maintains all the demat accounts and the other is Depository Participant (DP) that acts as an intermediary between the Central Depository and investors like you. In India, there are two depositories – The CDSL and NSDL. There are numerous DPs such as brokers, banks and financial institutions. When you open a demat account with a DP, you will be provided a unique identification number. Stock exchanges and companies will use this number to identify your demat account and to settle stock trading transactions for your demat account. Your demat account will hold all your securities in electronic form and it will display your entire investment portfolio.
How to open a Demat account?
To open a demat account you first need to choose your preferred DP. Next, you will have to fill the demat account opening form and submit documents for proof of identity and proof of address. You will have to provide documents such as PAN card, passport, driver’s license, electricity bill, IT returns, etc. Next, an In-Person Verification will be conducted to establish the authenticity of the details and documents you have provided. After your application is successfully processed, you will be provided with your account number and client ID by your DP. You can use these details to gain access to your demat account online. You can open a demat account even when you may not have any shares.
What is a trading account?
A trading account is your online access to stock trading. It is the account you use to place your buy/sell orders on the stock market. All your transactions in equities, mutual funds and other financial instruments can be conducted through your trading account. You cannot play the stock markets without a trading account since physical sale/purchase of securities was discontinued in the 90s. Your trading account will have a unique ID that will be used to settle your stock market transactions.
Difference between demat and trading account
A demat account contains an electronic record of all your financial instruments. In comparison, a trading account is used for placing buy/sell orders in the stock market. For better understanding, consider an example where you buy 100 shares of Company A. In this case, you will place the order using your trading account. Once the transaction is completed, the 100 shares of Company A will be credited to your Demat account.
How to open a trading account?
To maximize your returns from the stock markets, you will have to open a trading account with a good broker. You have to choose a brokerage firm that provides stock trading at high speeds. As mentioned earlier, every second counts in stock trading and you cannot afford delays in your buy/sell orders. You also need to check the brokerage rates and other charges. Once you have finalized your brokerage firm, you need to fill the stock trading account opening form and completethe KYC details. You will have to provide documents to establish your proof of identify and proof of address. After successful verification, the brokerage firm will process your application and send the details of your trading account. You can then access your trading account online and start trading in the stock market.
It’s always better to link your trading account with your demat account, so that transactions can be completed in a seamless manner. You can place orders online or through the phone. You can transfer shares between DPs if the need arises. You can also name a nominee while filling the account opening form. This will allow your loved ones to receive the securities in case of any unfortunate development.
