Types of Demat and Trading accounts
Demat and trading accounts have gained a lot of prominence in the last few years. As of March 2023, there are a whopping 114.46 million Demat accounts in India. While this seems like an impressive number, the penetration of stock market in India is less than 10%. And a major reason for this is lack of awareness and knowledge around Demat accounts.
Even today, investors have a hard time understanding the difference between Demat and trading account. Many aren't even aware of the different kinds of Demat and trading accounts in India. To ensure investors understand market terminology, this article discusses the various types of Demat and trading accounts in India.
What is a trading account?
A trading account is a type of account that allows individuals to buy and sell securities in the stock market. The account is linked to a Demat account, which holds the securities in electronic form, and allows the individual to trade online. Listed below are the different types of trading accounts you can opt for.
Equity trading accountThis type of trading account allows investors to buy and sell stocks, futures, and options. It is generally linked to a Demat account, which stores the stocks. An equity trading account can be of the two following types.
- Cash accountWith this type of account, investors have to pay the full price in advance for buying shares on delivery basis. Investors who use cash accounts own all the securities and money in the account. They are not permitted to borrow money from their brokers.
- Margin accountA margin account allows investors to borrow from brokers to purchase additional securities and have to pay interest for the borrowed amount. The shares purchased are pledged to the brokers, which can also sell stocks in the account to make up for losses, if any.
Commodity trading accountA commodity trading account allows investors to trade in commodities on a commodities exchange, such as the Multi Commodity Exchange (MCX). This type of account can only be used to trade in commodities and can’t be used to trade in stocks.
2-in-1 and 3-in-1 trading accounts:Investors need trading accounts, bank accounts, and Demat accounts to purchase or sell shares. Some brokerages provide a 2-in-1 trading account that integrates Demat and trading accounts. The primary purpose of a 2-in-1 trading account is to ensure a quick and seamless transfer of shares from trading to the Demat account after the purchase. Few brokers go a step further and offer a 3-in-1 trading account that combines banking facilities with trading and Demat accounts.
What is a Demat account?
A Demat account is an account that holds securities, such as equity shares and bonds, in electronic form. The term "Demat" is short for "dematerialised," which refers to the conversion of physical shares into electronic form. There are three different types of demat accounts:
Regular Demat accountInvestors in India need a regular Demat account to invest in the stock market. This type of account is ideal for those who trade in equity shares. Trading futures and options do not require a regular Demat account as they don’t involve a physical delivery of shares
The Basic Services Demat Account (BSDA) is a new form of Demat account that the Securities Exchange Board of India (SEBI) has introduced, similar to the regular Demat account. The main difference is that no maintenance is charged for holdings less than ₹50,000. For holdings between ₹50,000 and ₹2 lakh, the annual maintenance fee is ₹100. The BSDA was introduced to promote financial inclusion and to assist investors who want to participate in the markets but have yet to open a Demat account.
Repatriable Demat accountA repatriable Demat account is a type of account that allows Non-Resident Indians (NRIs) to transfer their wealth outside India. To open this type of account, NRIs need a Non-Resident External bank account and must close their regular Demat account and transfer its shareholdings to a Non-Resident Ordinary (NRO) Demat account.
NRIs are only allowed to repatriate up to $1 million USD in a calendar year. To open a repatriable Demat account, an NRI must comply with the Foreign Exchange Management Act (FEMA) and open a trading account with an institution authorised by the Reserve Bank of India (RBI).
Non-repatriable Demat accountNRIs who earn income in both India and abroad face challenges in managing their finances. They may find it difficult to keep track of bank accounts in different countries and transfer money between them. A non-repatriable Demat account is similar to a repatriable Demat account and is also for non-resident Indians, but it doesn’t allow funds to be transferred abroad as it requires an associated NRO bank account.
NRIs with both NRE and NRO accounts will not face these difficulties. They can own up to 5% of the paid-up capital in any Indian company, and invest in Initial Public Offers (IPOs) on a repatriable basis using their NRI Demat and bank account, as per Reserve Bank of India (RBI) regulations.
For non-repatriable investments, NRO and Non-Resident Ordinary Rupee (NRO) Demat accounts are used. If an NRI already had a Demat account before leaving the country, they can change its status to NRO or register a new account for trading.
Overall, trading and Demat accounts are an essential tool for anyone who wants to buy and sell securities on the stock market. They allow individuals to access the market and make trades quickly and easily with m.Stock.