By just opening a demat account, you gain access to trading various instruments like stocks, bonds, derivatives, currencies, and commodities. The other benefit is that you can also take part in IPO (initial public offering) bidding, receive dividends, and obtain bonus shares directly into your account.
Besides the demat account, there is another account known as a ‘trading account’. Although trading and investing are closely related, there’s a subtle distinction between the two.
Trading involves frequent buying and selling of shares with the aim of profiting from short-term stock price fluctuations. On the other hand, investing entails purchasing company shares with the intention of becoming a shareholder, participating in the company’s growth, and potentially earning capital gains through stock appreciation and dividends if the company distributes dividends.
Also Read: Demat: How does share transfer work in case account holder passes away?
For example, if you purchase a share and sell it for a profit within a short time frame, it’s considered trading. However, if you hold onto the share for a longer period, it’s categorised as investing. The demat account serves as the storage space for these shares.
In India, NSDL (National Securities Depository Limited) and CDSL (Central Depositories Services India Ltd) are the two depository services that offer demat accounts, serving as custodians responsible for safeguarding shares stored in demat accounts.
Depository participants (DPs), or stockbrokers, act as intermediaries between individuals and depositories, facilitating the creation and management of demat accounts.
Demat and trading accounts are distinct offerings provided by depository participants. If you’re a trader, you can open a trading account, whereas if you’re an investor, you can opt for a demat account.
In some cases, traders may have multiple trading accounts but only one demat account. In such situations, they may wonder if it’s possible to link all their trading accounts to the single demat account they hold.
In this article, we’ll delve deeper into this topic to provide clarity.
Also Read: Demat account: How to invest in international stocks? Here are 4 ways
Limitations of linking demat accounts to trading accounts
There’s a limitation to linking trading accounts from different depository participants to a single demat account. Most brokers restrict this practice due to operational challenges they may face.
For instance, if you have a demat account with your bank but choose to open a trading account with a discount stockbroker, many brokers won’t allow you to link the demat account from your bank to their trading account.
Let’s say a broker does permit clients to sell shares held in a demat account from another DP through their trading account. In such a scenario, the client must ensure timely settlement of the trade by transferring the stocks to the broker’s pool account within the stipulated timeframe.
However, if the client fails to transfer the shares on time, the stocks may be subjected to auction. Consequently, the client may be required to cover the difference between the selling price and the auction price.
Also Read: Demat Account: How to choose between full-service and discount brokers?
Some DPs do offer the option to link multiple trading accounts to demat accounts, but these linked accounts are typically considered secondary and may come with certain limitations.
Can I hold multiple demat accounts?
If you’re currently holding a demat account and considering opening another one with a different depository participant, you’re free to proceed. The process for opening a second demat account is similar to that of the first—you’ll need to submit the required documents as per the standard procedure.
Please note that you are not allowed to open multiple demat accounts with the same depository participants or stockbrokers.
Also Read: What are the KYC norms for opening a demat account?
There’s no restriction on the number of demat accounts you can maintain simultaneously. You’re allowed to have multiple demat accounts concurrently, each serving as a repository for your investments and transactions.
Having multiple demat accounts offers several advantages. It provides you with diverse perspectives on buying and selling stocks, granting access to various research insights and platforms offered by different stockbrokers. This diversity can enhance your decision-making capabilities as an investor.
However, managing multiple demat accounts can be challenging. It requires time and effort to monitor and handle each account, especially since different brokers have varying features and requirements. Additionally, maintaining multiple demat accounts means dealing with numerous documents, which can be cumbersome and may pose challenges in terms of organisation and security.
Also Read: How does a demat account facilitate trading in derivatives?
FAQs
How should I choose a stockbroker for opening an account?
When selecting a stockbroker for opening a demat account, consider it similar to choosing a bank for a savings account. Key factors to consider include:
Convenience: Check proximity to your office or residence and their business hours.
Comfort: Research the reputation of the stockbroker, any past associations with the organisation, and whether they offer the specific services you require.
Cost/Level of Service: Compare service charges levied by different stockbrokers and their service standards.
Do I need to maintain a minimum balance of securities in my demat account?
No, there is no requirement for a minimum balance in your demat account as prescribed by the depositories (NSDL and CDSL). You can maintain a zero balance in your demat account.
Can I transfer all my securities to another demat account and close my current demat account?
Yes, you can transfer all your securities from multiple demat accounts with one or more stockbrokers to another account.
What is a Basic Services Demat Account (BSDA)?
A Basic Services Demat Account (BSDA) functions similarly to a regular demat account but typically has no or low annual maintenance charges.
Can I link one bank account to multiple demat accounts?
Yes, you can link one bank account to multiple demat accounts if they are held with different stockbrokers. However, you cannot link more than one bank account with the same stockbroker for demat accounts.
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Published: 05 Apr 2024, 02:48 PM IST