Are you planning to start trading and investing in the stock market? Then you will require three essential accounts—a Demat account, a trading account, and a savings bank account. These three accounts have to be connected to carry out trading on the stock market. If you are wondering how these three accounts are linked, read on to find out.
A savings account is where you deposit funds with a bank; the funds earn interest annually. Savings accounts are liquid and are used for conducting transactions with ease.
A Demat or dematerialised account acts as a repository, holding your financial assets and securities in an electronic form. These assets include shares, mutual funds, bonds, and more. Just as your savings account holds your money, your Demat account holds your securities. In 1996, the Securities and Exchange Board of India (SEBI) made it mandatory to have a Demat account for trading purposes. Furthermore, in 2019, SEBI made it compulsory for all physical shares to be dematerialised. So, a Demat account is indispensable for the trading process, as it is impossible to trade without it.
The Central Depository Service Limited (CDSL) and the National Securities Depository Limited (NSDL) are the two depository participants (DPs) in India responsible for the management of securities and shares in an electronic form.
A trading account is an investment account used to trade securities and shares. While the Demat account is where you store the assets, your trading account is what you use to do the actual buying and selling. So, it acts as a bridge between your savings account and your Demat account. With trading accounts, you do not have to be physically present at the stock exchange for the purpose of trading. Rather all you need to do is open a trading account with a registered stock market broker who will trade on your behalf. You can access multiple stock exchanges using one platform using a trading account.
When you wish to trade shares, you need to have funds in your savings account. You use your trading account to buy the shares, and the money for it is transferred from your savings account. The shares are in electronic form and are deposited into your Demat account. When you go to sell your shares, they will be withdrawn from your Demat account, and the funds you receive as payment are deposited into your savings bank account.
Many banks, as well as brokers, offer both trading and Demat accounts, while some offer 3-in-1 accounts with a Demat, trading, and savings account under a single service.
When you link these three accounts, you can buy and sell shares, and other investment instruments such as bonds and mutual funds with ease. Moreover, it allows you to initiate transactions at any time and from anywhere using a smartphone or laptop. The trading process is made seamless and smooth with great flexibility, convenience, and speed, which is vital when trading on the stock market.
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