How to Trade in Demat Account?

The migration to online trading has made the Indian stock market more accessible than ever to retail traders. Anyone interested in creating long-term wealth can now participate in the markets. If you’re new to the world of trading and would like to get your wealth creation journey started, you first need to know how to do online trading with a demat account. In this article, we’re going to look at just that. But before we delve into it, let’s quickly read through the significance of a demat account.

Why Do You Need a Demat Account?

A demat account is an electronic account designed to safely store a wide range of financial instruments like equity shares, bonds, debentures and mutual fund units in an entirely digital format.

Earlier, before the introduction of the demat account, investors were holding financial instruments as physical certificates. However, these certificates were prone to getting damaged, misplaced and forged. Also, the transfer of securities from one investor to another was cumbersome. The certificates had to be physically delivered and a transfer request had to be lodged with the company. The entire process would take up to 30 days.

Thanks to the advent of the demat account, all the limitations and risks associated with physical certificates have been eliminated. Since financial instruments exist in an electronic format, there’s no risk of theft, misplacement, damage or forgery. As far as transfer is concerned, the demat account has sped up the process significantly. The process which used to take weeks, now only takes 24 hours. Moreover, the entire transfer of securities is automated and requires no intervention from the investors whatsoever.

Upon realising the advantages of the account, the Securities and Exchange Board of India (SEBI), the entity governing the Indian financial markets, mandated the requirement of a demat account for trading in financial instruments. Without it, you cannot participate in the Indian markets.

How to Trade With a Demat Account?

Now that you’ve understood the importance of the account and why you need one, let’s check out how to do online trading with a demat account.

To trade in the Indian financial market, you need two accounts - a demat account and a trading account. A demat account, as you’ve already seen above, is only used to electronically store purchased financial instruments. The trading account, meanwhile, is another electronic account that actually facilitates the purchase and sale of financial instruments on the stock exchange.

To ensure that trading is carried out seamlessly, these two - the trading account and the demat account are linked to one another. So, when you buy a financial instrument online using a trading account, the purchased units are credited to the linked demat account where it is stored safely until you decide to sell. And when you sell them through your trading account, the sold units are debited from the linked demat account. This is how a typical trade in the Indian stock market is carried out.

Here’s a hypothetical example to help you better understand how to do trading with a demat account and trading account.

• You open a trading account and demat account with a stockbroker cum depository participant to trade in the Indian stock market. These two accounts are linked to one another to ensure seamless trading.

• You decide to purchase 10 shares of ABC Limited, which is currently trading at Rs. 1,125 per share since you feel it is likely to rise in the future.

• Using your trading account, you place a buy order for 10 shares of ABC Limited for Rs. 1,125 per share. The total amount of Rs. 11,250 is debited from your trading account balance.

• Your stockbroker sends the buy order you placed to the stock exchange, where it is matched with a corresponding sell order from another investor.

• Once the orders are matched, your buy order is executed. Upon successful execution, the 10 shares of ABC Limited that you bought are credited to the demat account linked with your trading account within 24 hours from the transaction date.

• A few days later, the stock price of ABC Limited rose to Rs. 1,200 per share as you expected. You decide to sell the stock and book profits.

• Using your trading account, you now place a sell order for 10 shares of ABC Limited for Rs. 1,200 per share. This order is sent to the stock exchange, where it is matched with a corresponding buy order from another investor.

• Once a match is found, the sell order is executed and the 10 shares of ABC Limited that you currently hold in your demat account will be debited instantly. The stock exchange then credits these shares to the demat account of the buyer.

• The total trade value of Rs. 12,000 (including a profit of Rs. 750) is credited to your trading account balance.

Benefits of Trading with a Demat Account

Now that you know how to do trading with a demat account, here’s a quick overview of some of the benefits you get to enjoy.

• Demat accounts have sped up the securities transfer process between investors. Currently, it takes not more than 24 hours to transfer securities from one investor to another.

• Previously, with physical certificates, there were several costs associated with the transfer of securities. These included stamp duty charges, handling charges and other fees. With the advent of the demat account, most of them are now non-existent.

• Demat accounts have significantly increased the participation of retail investors and have immensely contributed to the liquidity and trading volume.

• Since both demat and trading accounts are electronic, you can trade in all your favourite financial instruments online from anywhere in the world and even when you’re on the move.

Conclusion

With this, you must now be aware of how to do online trading with a demat and trading account. Although the trading account is the one that facilitates the purchase and sale of financial instruments, the importance of a demat account in the trading process cannot be undermined.

Without the introduction of the demat account, online electronic trading as we know it today would not be possible. If you’re planning to trade or invest in the markets, make sure to open a trading and demat account with a reputable stock broker cum depository participant.