Trading requires some warming up to by learning about the various terms and tools required to carry it forward. One such term is a Demat account. Perhaps you are new to the world of trading and struggle with answering the question of how to use Demat accounts. This is surprisingly easy to answer as the goal of Demat accounts is simply to help you trade. Hence, they are made to be as easy to use as possible. Here is how to use Demat accounts for the purposes of trading.
What is a Demat account?
Demat referred to ‘dematerialized’ which is an account through which a trader is able to hold their securities in electronic format. Prior to owning electronic copies of their securities, traders were burdened with the paper stock certificates proving their ownership of particular shares. Since Demat accounts were first introduced in India in 1996, this problem has been taken care of.
Why do I require a Demat account?
As per the Securities and Exchange Board of India (SEBI), you are mandatorily required to open a Demat account to trade in India. Even trading foreign securities requires that you have a Demat account in your name. Hence, its function is essentially to behave like a safe for your trades. Not only does holding one’s securities in electronic format safer than physical copies, but one is also less burdened and can easily access their trades. Hence, Demat accounts appear to resemble the function of a bank account, except they do so for trading.
How to Open a Demat Account
Before we address how to use Demat accounts, it's crucial to know that even to open one, a one-time payment is typically required. After opening the account, there is typically an account maintenance fee (AMC) that is charged to your Demat account annually. You can compare different depository participants to find the prices at which the account you wish to open is friendly to your budget. However, it is rare to find a Demat account that will be free of this opening cost as well as account maintenance costs.
How to Use Demat Account
- Seek out a DP or depository participant with whose help you may open up a Demat account.
- Next, you will be required to link your Demat and trading account together if you wish to actually make use of your Demat account. The companies for each of your accounts can be different, but it is recommended to keep them the same.
- Once both accounts are linked, to actually begin your trade, you will first have to request for an order through your trading account. Your broker will then connect you to the trading exchange that is relevant to you where your trade can be executed.
- At the exchange, your order will be processed. Various details regarding your order including relevant details about your Demat account will be cross-checked.
- As soon as your order is processed, your Demat account will be credited or debited with electronic copies of the securities you were trading.
Conclusion: Learning the nitty-gritties of the demat account will help give one clarity while investing and trading in the stock market. This will ensure that mistakes are avoided, and that the process of investing is smooth.
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