InvestorQ : Is it possible to have a trading account without a demat account or is it mandatory to have a demat account?
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Is it possible to have a trading account without a demat account or is it mandatory to have a demat account?

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1 year ago

Do the SEBI regulations permit you to have a trading account without a demat account. SEBI regulations state that any activity in equity shares necessarily requires you to have a demat account. You cannot buy or sell shares without a demat account in your name. This also includes intraday trading, even though you do not need to take delivery of shares in this case. The question, therefore, is whether it is possible to operate a trading account without a demat account? Here are some cases you need to understand about trading account and demat account where it is possible to open a trading account only without having a demat account

Trading account alone is sufficient if you intend to hold the shares in physical form. In case you intend to rematerialize your securities back to physical form then trading account alone is sufficient and demat account will not be required. This is a common scenario in many cases. There are investors who have holdings they do not intend to sell. Alternatively, their holdings could be just too small to justify a demat account. Demat account has a cost in terms of annual maintenance charges; debit charge, administrative charges etc. In such cases, the shareholders can choose to avoid these charges by choosing to rematerialize their shares. In this case, they need to submit a remat request form (RRF) to their DP and then the DP takes it up with the registrar who will issue the new physical certificates. When the physical certificates are issued, then the investor can choose to close the demat account. The trading account can be maintained in this case as it does not entail any charge.

Secondly, trading account alone is sufficient if you only intend to trade in futures, options and currencies. All these are cash settled and hence question of demat delivery arises. In case you only want to trade in equity and index derivatives or even in currency futures, demat is not required and these trades can be directly executed through the trading account with the broker. This is the case with many traders. They find trading in futures and options on stocks and indices much simpler and more effective considering the leverage that they provide. As you are aware, futures and options are compulsorily settled in cash. That means the profits are losses are either credited or debited to your trading account. Since Futures and Options are mere contracts there is no ownership that is created in this case. You can only hold assets that you own in your demat account and hence futures and options cannot be held in demat account. That is why you only need a trading account in case you only intend to trade in F&O. However, there is a catch. Effective July 2018, SEBI has moved 46 stocks to compulsory delivery against derivative positions. That means any stock future position that is left for expiry will necessarily result in delivery. That means brokers may insist on a demat account even if you want to trade in stock futures and stock options.

The exception is if you intend to trade in currency derivatives only using your trading account. The exchanges permit you to trade currency pairs of the INR with hard currencies like the US Dollar, UK Pound, Euro and the Japanese Yen. These are just currency contracts which you can either use to hedge your currency risk or to trade a view on currencies. They are contracts that have to be necessarily settled in cash and hence there is no need for demat account. However, to buy and sell index ETFs and Gold ETFs you need a trading account to execute these trades.

Not all non-delivery transactions are permitted to be run without a demat account. A case in point is intraday trading. In intraday trading you buy or sell in the morning and then reverse the transaction before end of day. Since the net position is zero at the end of the day, there is no delivery. The question to be asked is do you need to have a demat account if you only intend to trade intraday? In an intraday trade, you initiate a position during the day and close out during the same day. As a result, your net position at the end of the day is zero, which means no delivery is required. That means there is no delivery and hence no role of demat account in intraday trading. There is a catch here! SEBI regulations stipulate that no trade in equity can be done without a demat account. Your intent is immaterial. An intraday trade may not impact your demat account but since it is a trade in equities, you will still require to have a demat account. The moral of the story is that whenever you trade in equities, be it for intraday or for delivery, having a demat account is a must. When we talk of equities here, we refer to ETFs also i.e. gold ETFs and index ETFs also.