Can I Trade Without Demat Account?

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One of the most important accounts you needed to participate in the Indian financial markets is a trading account. It is an electronic account that enables you to purchase and sell multiple securities online through stock exchanges. The trading account is usually linked with a demat account, which is used to safely store the securities that you purchase via the exchanges.

Generally, most individuals opt to open a demat account along with a trading account to make investing in the stock market seamless and hassle-free. But then, have you ever wondered whether you could trade without a demat account? Here’s a closer look at this. 

Is it Mandatory to Have a Demat Account to Trade?

According to the Securities and Exchange Board of India (SEBI), a demat account is mandatory if you’re purchasing certain securities. This includes equity shares of companies, debentures, bonds and Exchange Traded Funds (ETFs). This is true irrespective of whether you’re purchasing them via the primary market (IPO or NFO) or the secondary market (stock exchanges). 

However, if you’re purchasing any other securities, such as commodities or currencies, it is not mandatory to have a demat account. 

Can I Trade Without a Demat Account?

The answer to whether trading without a demat account is possible or not depends on the type of security that you’re planning to trade in. Let’s take a closer look at each of the major trading segments and see if you can trade in them without a demat account.  

Equity Shares and Equity Derivatives

If you’re planning to trade in the equity shares of companies, you mandatorily require a demat account. However, this is only true if you opt for equity delivery trades. In the case of intraday trading, the equity shares that you’ve purchased will not be delivered to your demat account. Instead, any open positions that you initiated at the start of a trading session will automatically be squared off at the end of a trading session. Since intraday trading bypasses demat accounts entirely, you don’t need them to place such trades. 

In the case of equity derivatives such as futures and options, until recently, you didn’t need a demat account to trade in them since they were mostly cash settled. However, the SEBI has now mandated physical settlement of equity derivatives on contract expiry. With this recent change in the rule, trading without a demat account has now been made impossible in the equity derivative segment. 

Index Derivatives

On the other hand, index derivatives like Nifty or Sensex futures and options are cash settled on the contract expiration date. Since there’s no physical delivery involved, you can technically trade without a demat account in this segment. 

Debt Instruments

Debt instruments like bonds and debentures that you purchase will be credited to your demat account. Therefore, you would need a demat account to trade in these securities. 

Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are mutual funds that are freely traded on a stock exchange, just like equity shares. And similar to equity shares, trading in ETFs on an exchange would require you to have an active demat account. 

Commodities

Commodities are one of the major trading segments in the Indian financial markets. There are multiple kinds of commodities that you can actively trade in India. This includes paddy, wheat, sugar, natural gas and crude oil, gold, silver, copper and aluminium, among others. Unlike equity shares, trading in commodities is carried out in India exclusively through derivative contracts such as futures and options. 

Furthermore, most commodity derivatives are cash-settled, whereas a few of them are settled through the physical delivery of the said commodities. Since commodity trading does not involve demat accounts in any way, you don’t need one to buy or sell commodities via exchanges. 

Currencies

Currency trading in India involves the purchase and sale of currency pairs. Some of the currency pairs that you can trade include GBP-USD, EUR-USD, JPY-USD, USD-INR, GBP-INR, EUR-INR and JPY-INR. As with commodities, currencies can also be traded only via derivative contracts such as futures and options. Furthermore, all currency derivatives are cash settled on expiry. So, in the case of the currency market, online trading without a demat account is possible. 

Can I Open a Trading Account Without a Demat Account?

Now, a A majority of investors generally tend to open both trading and demat accounts simultaneously. However, some may they may choose to open just a trading account alone. In the event of opening just a trading account, the investor will be restricted to just a few segments like equity intraday, index derivatives, commodities and currencies. That said, most stockbrokers typically tend to insist on opening a trading account with a demat account. 

Conclusion

Although you can trade without a demat account in certain specified segments, it is always a good idea to open a demat account along with a trading account. This will not only give you access to all the trading segments but also make trading a lot more seamless and hassle-free. Furthermore, with a demat account, you also get the option to convert intraday trades into delivery trades at will without having to bear heavy losses due to unfavourable market movements. 

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only.

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