Before getting to know what is Demat account, let us first understand why holding documents in digital form is more beneficial than having them in physical form.
Today, we are more into digital wallets like Google Pay, Paytm and all such. Because they are more secured and easily accessible.
The same way, having a Demat account helps you keep all your financial assets in a single electronic form.
The main purpose of Demat Account is to hold all the shares that you have bought or dematerialized (converted to electronic from physical shares) and to make trading easier for you.
What is Demat Account?
Demat account is also known as a Dematerialized account. The primary use of Demat account is to hold shares and securities in an electronic form. It helps you in online trading like buying or selling shares, or converting physical shares into electronic form. All the shares, mutual funds, bonds, government securities, and other investments are saved in a Demat account.
What is Dematerialization?
Dematerialization is the term used to define the process of transferring physical certificates into electronic ones. Overall, it makes the documents available round the clock and accessible at your fingertip. The main motto of dematerialization is to avoid holding physical shares and help you with seamless tracking and monitoring.
What is the Need of Demat Account?
Below are the four major features of Demat account that make you understand the need of Demat account:
1. Lower Costs:
Usually, investors need to spend on different unexpected expenses when transacting with physical share certificates such as handling cost, stamp duty and so on. You can eliminate all this by choosing a Demat account. You can also get to know the exact amount of the transaction beforehand.
2. Less Paperwork:
Earlier, shares transactions used to happen through certificates or physical receipts which used to incur a lot of paperwork and used to slow down the trading activities. Nobody used to be able to do any transaction without presenting their certificates.
Trading through physical securities was always risky with the threat of physical damage, loss, misplacement, or forgery. Demat accounts eliminate all these risks and give you peace of mind.
4. Instant Transactions:
Delivering physical certificates used to take days even weeks sometimes due to the administrative system that needed to be fulfilled. With the help of Demat account, you are avoiding the waiting period as it offers instant transactions.
Benefits of Demat Account
Following are some of the benefits that a Demat account offers,
- Easy to use, convenient and secured.
- Automatic credit of share in the event of a company merger, bonus, consolidation, and so on.
- All the Demat account information is accessible online just using a secure login.
- You do not need to keep visiting the stock market for transactions.
- Low transaction costs
- No stamp duty
- Unlike physical shares, here you can make transactions with odd numbers too.
- If you have a common Demat account, you do not need to update details from time to time. The companies will automatically receive your information from the Demat account.
- It offers a common banking solution.
How to Use the Demat Account?
There is something important to note here before getting to know how to operate the Demat account. A Demat account comes with a trading account linked to it, with unique login credentials. So, you will need to use the trading account for buying and selling shares. Demant account just holds all the purchased shares while trading account helps you sell and purchase the securities.
So, whenever you are planning to buy or sell a share, you should log in to the trading account, which is also connected with your bank account. When you try to buy or sell a share, the request is sent to a trading account of a particular stock, with all other details. Then, your DP (Depository Participant) will forward all this to the exchange immediately.
In case, if the request is to buy, the exchange will find a seller who is selling the specific number of shares and forwards the order to clearinghouses to debit that quantity of shares from that seller’s Demat account and credit it to your Demat account.
If the request is to sell, it works the other way around. Finally, the buyer and the seller can hold the Demat accounts with Depository Participants of different depositories. You can buy any shares or securities through Demat account. For instance, many have been struggling to understand how to buy mutual funds online, as mutual funds have been one of the best investment options lately. The good news is, you can do all this through a Demat account. You don’t go anywhere else!
What is the Procedure of Opening a Demat Account?
Here is the procedure to follow to open a Demat account
- Firstly, decide where you want to open the demand account. Then choose a DP you want to open the Demat account with. You can find many financial institutions and brokerages offering this service.
- Fill up the form and submit it along with the copies of all the necessary documents and a passport size photo.
- Have original documents handy for verification.
- You will receive a copy of the terms and conditions agreement. Go through it.
- A member of DP will get in touch with you and verify the details you have submitted.
- If the application is processed, you will get a Demat account number along with a client ID which you can use for online access.
- You need to pay some fees such as annual maintenance and the transaction fee (monthly basis). The fee differs from one to another Depository Participant. Some DPs charge a flat fee for each transaction while some charge a percentage to the total transaction value. DPs also charge for converting shares from physical forms to electronic ones, or vice-versa.
- There is no limit on the minimum number of securities to keep your account active.
Documents Required for Opening a Demat Account
While opening a Demat account, you need to submit your ID proof, address proof and a passport size photo along with an opening form. You will need to submit the photocopies of the documents and keep originals handy for verification.
Here is the detailed list of documents that are accepted as proofs for opening a Demat account:
Proof of Identity
- Voter ID
- Pan Card
- IT returns
- Bank Attestation
- Telephone Bill
- Electricity Bill
- Any other ID card which has your photo, issued by state or central government and other departments, regulatory or statutory authorities, scheduled commercial banks, PSUs (public sector undertakings), public financial institutions, or professional bodies like ICSI, ICAI, bar council, etc.
Proof of Address
- Ration Card
- Driving License
- Voter ID
- Bank Statement
- Bank Passbook
- Electricity Bill
- Telephone Bill
- Agreement for Sale
- Self-Declaration by Supreme Court or High Court Judges
- Document or ID card issued by State or Central Government and its departments, regulatory or statutory authorities, scheduled commercial banks, PSUs (public sector undertakings), public financial institutions, or professional bodies like ICSI, ICAI, bar council, etc.
Demat Account Glossary
Following are some of the jargons associated with Demat account that you need to know about:
1. Electronic Certificate:
You need a bank account, Demat account and a trading account to deal with investments. Whenever you purchase a share, your ownership for that specific share is marked through a certificate, which is available in electronic form. It is called an electronic certificate.
2. Central Depository:
Central Depository or CD is a central agency that maintains all the information associated with Demat accounts opened with DPs around the country. India’s CDs include NSDL (National Services Depository Limited) and CDSL (Central Depository Services Limited).
3. Depository Participants:
The depository participants or DPs are the fundamental intermediaries standing between the CDs and the Demat account holders. Several banks, financial institutes, and brokerage firms that offer Demat accounts to investors are all DPs.
4. Transaction Identification:
To be able to buy or sell electronic security, you need to have a trading account as already discussed. It is as important as opening a Demat account. Every trading account comes with a unique ID that is used for all the investment transaction. It is called Transaction Identification.
5. Portfolio Holding:
A Demat account keeps all your investment holdings such as exchange-traded funds, equity holdings, government securities, bonds, and mutual funds. All these together are referred to as portfolio holding. You can access them all through your Demat account.
If you own different portfolios of any particular company and wish to consolidate them into a single portfolio, you can get it done by forwarding the physical certificates to the RSTA of that company along with a letter with your signature.
7. Account Freezing:
You have the option of freezing your account or specific security for a given period.
Demat Account FAQs
1. How long does it take for a Demat account to be active?
It usually takes between 48 and 72 hours. Some of the brokerages and banks are helping the investors in activating the account just in a few hours.
2. What is a joint Demat account?
A Demat account can have a single owner or multiple owners up to three joint holders. The latter one is called a joint Demat account. So overall, it will have one main holder and one or two joint holders.
3. Can I open two Demat accounts?
You can open multiple Demat accounts. However, you cannot open more than one trading account through a broker.
4. Can anybody else operate my Demat account on my behalf?
Yes, somebody can operate your account only if you authorize them to do so. You need to submit an executed power of attorney to your DP.
5. Why should I share my bank details while opening a Demat account?
It is basically to protect your interests. The bank account details are mentioned in the dividend or interest warrant that you are entitled to. Additionally, a bank account is mandatory for opening a DP account.
6. Do I need to inform each company individually if I want to update my address?
No. You need to update the address only with the DP. It will update it into the system which automatically reflects into all databases of all the companies.
7. Can I change the nominee?
Yes, you can change the nominee by filling up a new nomination form
8. How long does dematerialization take?
It usually takes about 30 days.
Before Demat, the securities investment process was too lengthy and time consuming with heavy paperwork. Managing all the paper securities before 1996 was costly and burdensome. Additionally, there were risk factors associated with it, such as theft and physical damage. Demat account has made the overall trading experience more accessible and less time-consuming. Most importantly, it makes buying and selling securities safer and more secure. However, you need to understand your requirements and objectives to find the right service provider accordingly.