Introduction
If you want to invest in the stock market, you must have a trading account, a demat account and a bank account. Over the past few years, the number of demat accounts jumped four-fold to over 16 crore accounts as of June 2024.
Are you wondering, "What is a Demat account?" If yes, you are in the right place! In this article, you will learn about the meaning, features, types, and benefits of a Demat account, the process of opening one, and everything related to a Demat account.
What is the meaning of a Demat Account?
Everyone knows about savings accounts. These accounts held in a bank offer easy and instant access to our funds and keep them safe from mishandling or theft. A Demat account serves a similar purpose for investors. A Demat account is a short form for a dematerialised account. It provides the primary facility of holding shares or securities in an electronic form. While trading, shares can be purchased, sold or held in this Demat account, making it easier for users to trade. All investments and individual holds, whether in mutual funds, exchange-traded funds, government securities, shares, or bonds, are held in a single Demat account.
Using Demat accounts introduced the digitisation process of the Indian stock market for better monitoring and governance by the Securities and Exchange Board of India (SEBI). By storing securities in a dematerialised form, the risk of theft, damage, and malpractice is eliminated. In 1996, The National Securities Depository Ltd or NSDL was created by the National Stock Exchange. Demat trading was introduced for the first time for National Stock Exchange (NSE) transactions. Demat accounts have successfully eliminated the need to hold physical share certificates. These days, anyone can open a Demat account online in less than five minutes.
What are the Features and Benefits of a Demat Account?
The rise in popularity of Demat accounts is due to the different features and benefits they offer. The following information will change your mind if you don't have a Demat account.
1. Instant Access
Investors can access their investments or statements via online banking using a Demat account.
2. Seamless Conversion
With the help of a depository participant through their Demat account, investors can quickly and seamlessly convert their physical security certificates into electronic form through dematerialisation. Likewise, investors can convert their digital securities into physical certificates through rematerialisation.
3. Receive Benefits and Dividends
Whether it is a refund, interest, or dividend, any monetary benefit associated with an investor's securities in the Demat accounts is instantly credited to the same account. Information about bonus issues, right or public issues, stock splits, and so on will also be provided in your Demat account through Electronic Clearing Service (ECS).
4. Share Liquidity
A Demat account provides instant liquidity, enabling investors to easily sell their securities or access funds.
5. Easy Transfer
With a Demat account, investors can readily transfer shares securely, efficiently, and conveniently.
6. Loan Facility
Apart from all this, investors can also use the securities in their Demat account as collateral to avail of loans.
All these features and benefits make a Demat account the perfect platform to manage your investments under one roof.
What Is the Difference Between a Trading Account and a Demat Account?
The two prerequisites to start trading on the stock market are a Demat account and a trading account. A common misconception is that a Demat account is the same as a trading account. Well, these accounts must work in tandem to ensure you can transact on the Indian stock market. Here are the differences between a trading and a Demat account.
1. Function
A Demat account is essentially a digital account that allows investors to store their shares or securities digitally. On the other hand, a trading account is also a digital one that is needed to ensure investors can purchase or sell their securities on the exchanges. The primary role of a Demat account is to electronically store securities and safeguard them. In contrast, a trading account is needed to facilitate any orders to purchase or sell on exchanges.
2. Issuer
A depository, through a depository participant, issues a Demat account, whereas a trading account can be issued only by a SEBI-registered stockbroker. Both Demat and trading accounts have unique IDs, and the investor must use them to identify and access these accounts.
3. Charges
A Demat account usually comes with various charges, such as an annual maintenance charge, transaction fees, custodian fees, conversion charges, and so on. When it comes to trading accounts, stockbrokers don't usually levy any charges. However, a brokerage is payable for any trade orders executed through the trading account.
Who Are the Key Participants?
Understanding the key participants involved in dematerialisation is an important aspect of understanding how it works. The four crucial agents involved in dematerialisation are as follows.
1. Depository
A depository is similar to a digital bank that holds your investments. In this, all the securities of an investor are held in electronic form. Investors no longer need to hold conventional paper certificates as proof of ownership of their securities or investments. India's primary depositories are the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). The role of a depository is to connect individuals or investors with companies that are issuing shares or financial securities. Depositories offer safe, secure, and efficient management of all your investments in one place. SEBI overlooks the functioning of depositories, and they operate under strict guidelines to retain the financial market integrity in India while facilitating secure and smooth transactions.
2. Investor
An investor can be an individual or a partnership firm that owns securities such as bonds or shares in an electronic form. To hold their securities electronically, investors must open a Demat account. Once an investor's Demat account is in place, their name is linked to a specific depository that holds their investments in a dematerialised form. By using their Demat account, investors can actively purchase, sell, or hold securities.
3. Depository Participant
Investors and depositories are two separate entities. A key agent known as a depository participant (DP) links investors with a depository such as CDSL or NSDL. Essentially, a depository participant is an intermediary registered with SEBI and abiding by its guidelines. From opening Demat accounts to ensuring smooth functioning, depository participants make it easier for investors to manage their dematerialised securities.
4. Issuing Company
The fourth key player in the dematerialisation process is the issuing company. An issuing company is any business or legal entity registered with a depository. The primary reason issuing companies offer securities to the public is to raise funds. For this, they must register themselves with the concerned depositories. Issuing companies can issue various securities, such as commercial papers, shares, bonds, or any other financial instrument. Their primary role is to provide investors with investment opportunities.
What is Dematerialisation?
Until now, the word dematerialisation has been used repeatedly. As you know, it is the process of converting physical securities into digital ones. Here is how the process of dematerialisation occurs.
- Before the depository participant can dematerialise an investor's securities, they must submit all the required paper certificates. The DP then turns the physical assets that are handed over into digital ones.
- The second step is to notify the depository participant who intimates the depository about your desire to convert the physical assets into an electronic form. This initiates the process of dematerialisation.
- Once the DP has all the certificates, they are forwarded to the company's registrar, who handles these records. Once the registrar ensures everything is in order, they confirm the dematerialisation request by consulting the depository.
- Once all the confirmations are in place, the paper securities submitted in the first step are transformed into their electronic form. This makes it easy to manage and trade securities.
- Once the dematerialisation is successful, the registrar updates their records and informs your depository. In turn, the depository also updates its records upon receiving the securities in their electronic form. The information about the same is passed on to the investor through their DP.
- The final step is when the DP completes dematerialisation by updating your Demat account with the new electronic assets to ensure your investment journey is smooth, secure, and efficient.
How Does a Demat Account Work?
Now that you know how dematerialisation works, the next aspect is to understand how a Demat account works. As mentioned, the Demat account is a digital repository that holds and manages your securities in a digital form. Here is how a Demat account works.
1. Set Up a Demat Account
The first step is to create a Demat account with a registered DP to trade and invest in the Indian stock market. Any brokerage firm or bank authorised by the primary depositories in India, such as NSDL and CDSL, is the authorised depository participant.
2. Link It to a Trading Account
Once your Demat account is authorised and activated, link it to the trading account concerned. As mentioned, you need a trading account to purchase or sell securities in the stock market, whereas a Demat account is used to hold them in their digital form. To provide seamless transactions on the Indian stock market, both these accounts must be linked.
3. Place An Order
To initiate the trading process, you can either place an order to buy or sell securities via the linked trading account. The trade order must specify the price and quantity at which you want to either purchase or sell concerned security.
4. Processing the Order
Once the order is placed, the trading account forwards the same to the concerned Stock Exchange. The Stock Exchange then matches the trade order with a suitable party in the market. For instance, if you wish to sell shares the Stock Exchange matches your sale order with someone willing to purchase the same number of shares at the price mentioned in your order to sell.
5. Verification
Before the order can be processed, the Stock Exchange performs an important process of verifying the market price of the shares and the available funds or shares in your Demat account. This process ensures investors have the required securities or funds needed to complete a specific transaction.
6. Execution
Once the order is verified, the trade is executed. For instance, if you desire to buy shares and the trade order to buy is executed, the corresponding number of shares will be automatically credited to your Demat account. On the other hand, if a trade order to sell is executed, the corresponding number of securities will be debited from your Demat account.
7. Maintaining a Record
A Demat account not only does away with the need for physical share certificates but maintains a detailed record of all the securities an investor holds. It also specifies the type and quantity of securities held by an investor.
8. Hold and Manage Securities
A Demat account is not just used to purchase and sell securities. It can also be used to hold and manage them too. Using your Demat account, you can manage your investment portfolio, track the value of your investments, and securely hold securities. It provides a bird's eye view of all your investments in a single place.
If any corporate, bonus, or split actions related to your securities occur, the funds are automatically credited to your Demat account. So, any benefits or updates about your securities can be found in your Demat account itself.
9. Sell Securities
Trading not only involves buying securities but selling them too. Whenever you wish to sell certain securities from your Demat account, a delivery instruction note with the required details must be provided. Based on this, the appropriate securities will be debited from your Demat account and any proceedings from it are credited to the trading account.
How to Open a Demat Account?
Now, all that's left to do is open your Demat account to start trading. A common misconception most harbour is that opening a Demat account is a tedious and time-consuming process. These days, anyone eligible to open a Demat account can do so online and within five minutes by following the steps given below.
1. Select a Depository Participant
The first step is to choose a DP. A quick Google search will yield results on leading DPs in India. Usually, most brokerage firms and financial institutions act as DPs and ensure you choose a reputed and recognised one.
2. Fill out the Demat Form
The next step is to fill out an online form to open your Demat account. To do this, ensure you have the required documents, and they are valid and up to date. To initiate the process of opening your Demat account, ensure copies of the following documents are in place.
- A valid PAN or Aadhaar card, voter's card, passport, driver's license, or any other proof of identity
- Proof of residency or address proof
- Proof of income
- A valid PAN card
- Recent passport-sized photographs
- A canceled cheque and proof of an active bank account
3. Document Verification
Once you submit the attested copies of the required, the next step is to wait for their verification. The DP undertakes this process, and it is usually instantaneous.
4. Sign an Agreement
After this, you must sign a standard agreement with the DP outlining the associated charges, rules and regulations, and terms and conditions of your relationship.
5. Verification and Creation of a Demat Account
Once the agreement is signed, the DP will carefully review the submitted documents. Once it is successfully verified, your Demat account is ready. You will receive a Demat account number and ID. These are essential credentials and will be needed to access and use your Demat account.
What Are the Types of Demat Accounts?
While opening a Demat account, it's important to choose one that fits your profile and investing goals. Here are the four types of Demat accounts in India.
1. Regular Demat Account
Any Indian investor who is a resident and wishes to trade in shares alone and requires space to hold their securities can opt for a regular Demat account. Whether you are a resident or a non-resident, you can still trade in the Indian stock market using a Demat account. Whenever you purchase or sell any shares, they are credited or debited respectively to your Demat account.
2. Basic Services Demat Account
A Basic Services Demat Account (BSDA) is a fairly new type of account introduced by the SEBI. Unlike a regular account that's perfect for investors who regularly trade in securities, a BSDA is ideal for infrequent investors.
3. Repatriable Demat Account
Even a non-resident Indian (NRI) can trade in the Indian stock market using a Demat account. If the NRI investor wants to transfer any earnings from the Indian stock market to a foreign account, a repatriable Demat account is recommended. In this, the funds are directly deposited into a Non-Resident External (NRE) account and can be transferred abroad from there.
4. Non-Repatriable Demat Account
Another option for NRIs is a non-repatriable Demat account. As the name suggests, any funds from the Indian stock market cannot be transferred to a foreign account. Instead, they are deposited in a separate account known as a Non-Resident Ordinary (NRO) account. The funds can be transferred from an NRE to an NRO account, but not the other way around.
If, after opening a Demat account, there's any change in your residency status, the Demat account must be updated. Usually, a new Demat account must be created if a resident's status changes to a non-resident. Apart from this, non-residents must open a separate bank account to facilitate this trade, depending on whether they wish to repatriate their funds.
What are the basic Demat Account charges?
Opening a Demat account doesn't cost anything, but certain charges are payable to ensure it functions seamlessly. Whether it is a brokerage firm or a bank, here are some common charges associated with maintaining a Demat account.
1. Custodian Fees
All depository participants are liable to pay a custodian fee to the NSDL or CDSL. This is acquired from the investors as a one-time fee or an annual charge.
2. Annual Maintenance Charges
Usually, an annual maintenance charge is levied on a Demat account. The fee payable by an investor is calculated by the depository according to SEBI guidelines. From 1st June 2019, the fee for a BSDA is ₹100 if the holdings are between ₹1,00,000 to ₹2,00,000. However, no fee is payable if the debt securities in the Demat account are below ₹1,00,000.
3. Demat and Remat Fees
A dematerialisation or rematerialisation (remat) fee is payable to cover the cost of digitisation or physical printing of securities purchased or sold. This fee is usually a small percentage of the total value of securities bought or sold.
Apart from all the above-mentioned fees, additional charges that an investor is liable to pay include an opening fee, rejected instructions fee, credit charges, and any other applicable taxes.
Conclusion
A Demat account is an essential tool for anyone interested in investing in the stock market. The process of holding and trading in securities is simplified when converted to an electronic form in the Demat account. From improved convenience and ease of use to safety and efficiency, a Demat account offers more benefits, such as quicker transactions, portfolio management, and reduced paperwork. This account seamlessly brings together online trading and digital finance.
Whether you are a new or an experienced investor, having a Demat account is crucial. Opening a Demat account brings you a step closer to achieving your investment and financial goals in today's times. However, before opening a Demat account, ensure you understand the intricacies of how it works. As always, any investment decision is subject to market risk and therefore, understanding what you are doing is important.
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