A Demat account is also known as dematerialised account wherein investors can hold their shares, stocks, bonds, and mutual funds in electronic form. With the introduction of this digital repository, the need to hold several physical certificates and keep track of them is eliminated.
What is a Demat Account?
A Demat account is a repository where financial securities like stocks, shares, bonds, and mutual funds are held in electronic form. Safe-keeping of physical certificates becomes a hassle if you have invested in several securities. Demat account makes the task easy by holding all the securities in a single platform. Access to securities becomes easy and you can keep track of your investments in real-time. Demat accounts enable online transactions and reduce paperwork. Demat accounts make buying, selling, and transferring financial securities very convenient. You will have access to several trading platforms and can trade and transfer securities electronically. Demat accounts have become an integral part of investments in the digital age as it facilitates efficient buying and selling of assets.
What is Dematerialisation?
The process of converting physical certificates of financial securities like stocks, shares, mutual funds, and bonds is dematerialisation or demat. Dematerialisation involves recording the ownership of securities electronically.
Features of a Demat Account
Given below are some of the features of Demat Account:
- Streamlines Share Transfers: Investing in financial securities and selling is easier and faster as you can conduct the activities with the help of e-DIS i.e., Electronic Delivery Instruction Slip. All the required details will be available in these slips which makes the processing easy.
- Provision for Account Freezing: A demat account provides the provision of temporarily freezing your account. You can opt for this when you intend to keep your trading activities on hold for a short period. This safeguards your account against unauthorised debits or credits.
- Expedites Trading Activities: Physical handing over of instruction slips to the Depository Participant delays the whole process. With a Demat account, you can pass on these instructions to the DP electronically which expedites the process.
- Pledging Securities Made Easy: Assigning the securities to banks/financial institutions to avail loans by pledging the securities is easier when done electronically. This is enabled with a demat account. It not only reduces elaborate paperwork but also minimises the time consumed for loan processing.
- Numerous Access Channels: The demat accounts are managed electronically. This feature enables access to your account through computers, smartphones, or any other internet-connected smart devices.
- Prompt updations: If you have a demat account, you automatically qualify for dividends, credits, and corporate interests. These accounts are promptly updated with periodical bonus distributions, right shares, or stock splits.
Benefits of a Demat Account
Below given are the different benefits of Demat Account:
- Easy and secure holding: Managing and safe-keeping physical certificates is stressful. Having all the financial securities in a single platform makes monitoring easy. It reduces the risk of theft and damages.
- Economical: Physical certificates are associated with various expenses like handling fees, stamp duty, etc. With a Demat account, you can avoid these extra expenditures which makes it economical.
- Provision for Odd lots: With physical securities, buying and selling was only in fixed quantities. Trading in odd lots was a problem. Demat accounts have solved this issue by allowing trading in odd lots.
- Saves time: Demat account has considerably reduced the time required to complete a transaction. The reason is the absence of elaborate documentation.
How Does a Demat Account Work?
Demat accounts facilitate investment in shares and securities electronically. Physical financial securities are converted to electronic forms for easier access. Charges are applied for opening and managing these accounts.
Demat accounts work akin to bank accounts. To optimise the utility, demat accounts are linked to trading accounts. When you buy shares of a company through your trading platform, your depository participant relays your ‘buy’ order to the stock exchange. The exchange matches your order with a corresponding ‘sell’ order from another trader or investor. Once matched, the exchange sends an order to a clearance house for trade settlement.
Following the settlement, the shares bought are credited to the buyer’s Demat account, while the seller’s account is debited. This streamlined process resembles banking operations, enhancing efficiency in share trading.
How to Use a Demat Account?
Follow the process below to use a demat account:
Step 1: Demat account login is the first step to using a Demat account. Log in with your client ID or account number.
Step 2: A list of your holdings such as shares, securities, bonds, or mutual funds will appear on the screen.
Step 3: Alongside a demat account, you need a trading account for transactions.
Step 4: Link your demat and trading accounts to your bank account.
Step 5: To initiate trading, place an order via your trading account.
Step 6: Your broker will connect you to the relevant exchange for execution.
Step 7: The exchange processes the order electronically.
Step 8: Your demat account reflects credits or debits based on the transactions and you will receive confirmation via email and SMS.
Step 9: Leverage the Demat account for real-time market updates and investment analysis
Step 10: Set automated buy/sell instructions, and receive timely alerts.
Types of Trading & Demat Accounts
Trading Accounts
A trading account is similar to a bank account with a slight difference. You sell and buy securities in a trading account. Different types of trading accounts are:
- Equity Trading Account: You can trade stocks, futures, and options with this account. For owning stocks and participating in IPOS you will need a demat account along with this account. If physical ownership of stocks is not required as in the case of futures and options, only a trading account will suffice.
- Commodity Trading Account: Like trading in stocks you can trade in commodities as well. Though the regulatory body is SEBI for both stock as well as commodity trading, a separate account is required for trading in commodities.
- Offline and Online Trading Accounts: An offline trading account is where the order is placed through a call to the broker. The exchange of information is verbal. In online trading accounts the information is relayed through internet-linked applications.
- 2-in-1 and 3-in-1 accounts: A 3-in-1 account where a trading account, demat account, and a bank account are required. In a 2-in-1 account, the trading account and the Demat account are combined to make the transfer of funds and shares simple.
- Discount and Full-Service Trading Accounts: Discount trading accounts are gaining popularity. They provide basic trading services without extra features. In contrast, full-service trading accounts include research reports, stock advice, and additional perks along with trading services.
Demat Accounts
Demat accounts are required to hold financial securities in digital form. The different types of demat accounts are:
Regular Demat Account: This type of Demat account is ideal for investors residing in India and who deal only in equity shares.
Repatriable Demat Account: In this type of account the transfer of funds overseas is permitted. These accounts are meant for Non-Resident Indians. However, these NRI investors should maintain an NRE account in India.
Non-Repatriable Demat Account: This again is meant for NRIs. In this type of demat account, transfer of funds overseas is not permitted.
How to Choose the Best Demat Account?
Consider the following for the best Demat account:
- Opening the account should be simple and fast
- Software and User Interface available
- The cost involved in trading and brokerage
- Annual Maintenance Charges
- Availability of online analytics on demat holdings
- Square off timing of day trading
How to Open a Demat Account?
Do you need to know how to open a Demat account? Follow the procedure given below:
Step 1: Identify the Depository Participant you intend to open the account with.
Step 2: Fill out an online account opening form available on the official website of the DP
Step 3: Provide basic details like the name, contact address, email ID, and telephone number.
Step 4: Add your PAN card details.
Step 5: Provide your bank account details like name of the bank and branch, account number, and IFSC Code.
Step 6: Upload KYC documents like PAN, Aadhar Card, Driving Licence, etc. These are required for proof of address and Photo Identity.
Step 7: Complete the online verification process which involves taking a video of yourself reading the script given. The script contains details like your PAN, address, etc. Submit the video to complete the verification
Step 8: Sign digitally using your Aadhar-linked mobile number.
Step 9: After completing all the steps, apply.
Step 10: Your Demat account will be opened within a few days.
Step 11: You will receive a communication providing the details of your demat account and the login credentials.
Demat Account Charges
The following are the Demat account charges:
- Account opening charges: This is a one-time nominal fee collected at the time of opening the account. Some DPs provide a free Demat account for the 1st year and collect a fee the following year.
- Annual Maintenance Charges: These will be collected annually and range between Rs. 300 to Rs. 800.
- Safe custody charges: Prior to the digitisation of securities, brokers would charge for the safekeeping of the physical certificates of traders.
- Transaction Fees: These are charges levied for debiting and crediting securities to the demat account.
Documents Required for a Demat Account
The documents mentioned below are necessary to open a Demat account:
- PAN card
- Aadhar Card, Driving Licence, Passport etc. for address proof
- PAN Card, Aadhar card, Driving Licence, etc. for photo identity proof
- A cancelled cheque with branch IFSC Code
How to Link your Aadhar Number to Demat Account?
To link your Aadhar number to Demat account:
Step 1: Visit the NSDL website.
Step 2: Click on the ‘Link Aadhaar with Demat Account’ tab on the home page
Step 3: Enter your PAN. name of DP, DP ID and Client ID. Key in the verification code and proceed.
Step 4: OTP will be sent to your mobile or email address.
Step 5: The demat information will appear on the screen. Confirm if correct.
Step 6: Enter your date of birth, gender, and Aadhaar number and proceed.
Step 7: Enter the OPT sent to your mobile number linked to Aadhar.
Step 8: Your Aadhar number will be linked to your demat account and you will receive a confirmation via email.
Demat Account FAQ’s :-
Yes. Demat accounts are mandatory as the practice of issuing physical certificates no longer exists
Yes. You can open a demat account online in just 10 to 15 minutes.
Yes, Joint Demat accounts are permitted. KYC documents of all the account holders have to be provided.
Once the sale proceeds reflect in your Demat account, you can withdraw funds through your trading account.
Yes. To trade in shares, you need to link your demat account to the trading account.