Trading digitally is much easier than physical trading. Physical trading involves transfer of physical certificates or the commodity to the buyer. This would eventually increase the cost of purchase for the buyer. Although, the equity shares and bonds are not traded in the physical form but some of the commodities are actively traded in the physical market.
For the majority of people, convenience is much more important. To successfully increase the penetration that convenience has to be digitally provided to the user. The demat account provides that convenience of investing to the user. A demat and trading account saves multiple types of costs. A bank allows people to transfer money from one account to another, similarly a brokers’ demat account allows investors to transfer financial instruments from one account to another.
Demat Account Meaning
An online demat account acts as a digital locker for all financial instruments that are traded in the market. Whether it is a government bond, or an equity share, of a commodity it can be stored in a single demat account. You do not require different demat accounts to store different assets, all assets can be stored in a single demat account.
Trading Account Meaning
Trading account means an account which is used to find the right buyer for the right seller. In short, it is used to buy and sell financial securities. The trading account servers display live price fluctuations on the exchanges. It keeps a record of all buy and sell orders. The trading account overlooks the security of the transaction.
Working Of A Demat Account
A demat account works similar to a bank account. Just like in a savings account, the money gets stored. In a demat account, financial securities get stored in a demat account.
Whenever a buy order is placed, the demat account sends the order slip to the depository. Then the depository matches the bid price with the ask price, once it matches, the shares are credited into your demat account.
Similarly, when you place a sell order, with the help of a trading account, the depository matches the ask price with the bid price on the exchange and then, once it matches, the security is debited from your demat account and the sale proceeds are credited into the demat account.
In case of a buy order, the financial securities are transferred into the demat account. In case of a sell order, the proceeds get credited into the bank account directly from a demat account.
Dematerialization Of Shares
Earlier, companies used physical certificates as ownership in the company. The traditional method had a lot of troubles such as, theft of shares during transit, signature mismatch, and sometimes even forged certificates were distributed. Therefore, to rectify these issues, the Government of India, decided to dematerialise the shares into electronic format.
Post dematerialisation, the shares were converted and stored in an electronic format. Demat accounts were not only introduced to store shares digitally but also to transfer shares from one demat to another.
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How Are Demat and Trading Accounts Different?
A trading account is used to buy and sell shares directly from the exchanges. The shares if bought for delivery purposes are stored in a digital account. That digital account is called a demat account. Demat account does not entitle in buying or selling, it just transfers and stores financial securities.
Opening a demat account is the stepping stone of the investment journey. Once it is completed you are ready to begin your financial journey. An investor should remember that it is important to choose the right broker for a demat account.