Dematerialization is nothing more than paperless trading, introduced some years back. During this procedure, the physical certificates are transformed into electronic certificates. For this purpose, the Demat account holds titles in dematerialized form. It is often misunderstood as a brokerage account that acts as an intermediary between the Demat account and the savings bank account.
Certain requirements must be met to invest in securities on a stock exchange. One requirement is that an investor must own an account and brokerage account. This article tries to clarify the difference between the demo account and the brokerage account.
Demat Account Definition
Demat expands to dematerialization, which refers to converting physical certificates into the paper of securities given to an investor in an equal number of shares in a computerized format. After the bonds are converted, they are transferred to the investor’s capital account.
As per the Depository Act 1996, India’s Securities and Exchange Board has made it mandatory for investors to have a Demat Account to carry out a transaction on the financial market. Thus, the investors open a demat account when they register with the stockbroker. There are some advantages of a Demat account which are:
- Immediate credit of the bonus issue/entitlement to the shareholder’s account.
- The risk of loss, forgery, and theft does not exist.
- Low transaction cost.
- No stamp duty is paid.
Brokerage Account definition
A brokerage account refers to an account that facilitates an investor to buy and sell securities. In this account, securities are deposited with the investment broker for brokerage purposes.
The account is a bridge between the savings bank account and the account holder’s Demat account.
Suppose you have shares of A Ltd. in your Demat account and want to buy shares of B. Ltd. You need to transfer money from your savings bank account to your brokerage account. You can now buy shares of B Ltd. either from the stock market or from a trader by placing money in the seller’s brokerage account. The shares of B Ltd. are then deposited into your Demat account linked to your brokerage account.
Likewise, if you want to sell A Ltd. shares, you need to retrieve your shares from a capital account and transfer them to the brokerage account. After that, the shares are sold on the stock market, and the money earned is transferred to your savings account.
Difference Between Brokerage Account and Demat account
That account that enables the account holder (investor) to store stocks and bonds electronically is called a Demat Account. A brokerage account is an account the account holder places an order for brokerage in securities is a brokerage account.
To open a Demat account, prior approval from SEBI and NSDL is needed, which is not the case for a brokerage account because the process of opening a brokerage account takes less time than a Demat account.
The Demat account serves as a bank, where bonds purchased are deposited and bonds sold are withdrawn. The brokerage account is used for placing orders for buying and selling on the secondary market.
After opening a Demat account, the account holder must pay the Annual Maintenance Fees (AMC), which depend on your stockbroker. On the other hand, these charges are not paid to the brokerage account.
A Demat account is good for those who invest in the financial market and hold securities in a dematerialized form, unlike the brokerage account, which is suitable for traders who carry out transactions in the derivatives segment such as commodities, index, currency futures, options, etc, especially those who trade in the cash segment.
In short, a Demat account is an account that holds securities in a non-physical form, while a brokerage account serves a significant role in the purchase and sale of securities. In a buy transaction, the brokerage account receives money from the save account, buys shares, and transfers them to the registered account, and while selling shares, the account receives shares from the account, transfers money, and sells shares to the brokerage account.