How is a Demat Account Different from a Bank Account? Here Are the Key Distinctions

The most that a Demat account and a bank account have in common is the word ‘account’. Each of these accounts serves different purposes and has distinctive features. Knowing how they differ goes a long way in being informed of the roles they play in the world of investment and finance. 

Accounts in Investment 

Several different accounts play various roles in the realm of investment. This may confuse new investors as the accounts, although distinctive, may be related due to their functions. Among all the accounts that investors use to invest in securities, the Demat account holds paramount importance. 

With a Demat account, investors use another account that is linked to the Demat account for all their trading transactions.

This is the trading account. In turn, both these accounts are linked to an investor’s bank account which is used for the debit of funds when investors wish to buy securities like stocks, and for credits in case investors make profits in stock trading.

Investors must have clarity on the roles these accounts play in their investment activities, particularly in grasping the differences between a bank account and a Demat account. 

About Demat Accounts 

Every investor has to open a Demat account to trade in the financial markets in India, particularly if they wish to invest in stocks, IPOs, mutual funds, bonds, ETFs, etc. A Demat account is essentially an electronic storage facility for holding securities in digital formats. 

You can store different securities in your Demat account and monitor them online. By storing your securities in a Demat account, they are held as digital assets although they have monetary value. 

Demat accounts are linked with trading accounts to enable the smooth activity of trading and the transfer of shares and other securities. They have revolutionsied the investing realm by securing assets safely in one spot and eliminating the physical holding of assets. 

About Bank Accounts

A bank account is basically a repository to store your cash and is managed and run by a bank or any other financial institution. Transactions related to bank accounts involve the transfer of funds, deposits, and withdrawals. Both a Demat account and a bank account can be accessed online and both can facilitate convenient access. 

A Demat Account and a Bank Account – Key Distinctions

Demat accounts and bank accounts differ based on key factors, and these are mentioned below: 

• Function and Purpose

The function of a Demat account is its main use as an electronic storage facility for securities in digital formats. 

Demat accounts may be linked to trading accounts and this enables the smooth transactions of trading (buying and selling securities like stocks and mutual funds). When you open a Demat account, you can open a trading account as well. 

A bank account serves the purpose of managing and storing money. Through a bank account, account holders may undertake functions like making deposits and withdrawals, and transferring cash. Bank accounts are also used to pay utility bills online, and for availing loans and making EMI payments. 

• Opening Accounts

A Demat account is opened at a broker or a depository participant, while a bank account is opened in a bank.

• Assets Held

Securities that are stored in a Demat account are held in digital formats. These include shares, mutual fund units, bonds, government securities, debentures, ETFs, and more. 

Bank accounts hold your funds in cash and these may be withdrawn, deposited, or transferred as investors require. Bank accounts are also used for investment purposes such as receiving interest deposits from financial instruments like fixed deposits and savings certificates. 

• Transactions

The transactions made through a Demat account involve the buying, selling, and transfer of securities. Via a Demat account and a linked trading account, investors can trade on stock exchanges. 

With a bank account, customers can withdraw, transfer, or deposit cash and make several payments online. 

• Regulatory Authority

A Demat account is governed by a securities and financial markets regulatory authority such as the Securities and Exchange Board of India, while a bank account is regulated by the Reserve Bank of India, the chief central bank of India. 

• Returns

There are no returns generated through a Demat account unless securities are sold through a trading account to earn a profit. Returns may be viewed as the increase in value of the securities in a Demat account. 

Bank accounts may give you earnings as interest, depending on the account you choose to operate. 

Main Differences in Accounts

 

While a Demat account and a bank account are both necessary for investment purposes, they have distinctive features and cannot be confused with one another. It is important to know how they operate to make your investments and transactions thereof seamless.