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Demat Account: Meaning, types, benefits & guidelines to open a demat account

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. 

Isn’t it?

The same way, having a Demat account helps you keep all your financial assets in a single electronic form.

The main purpose of the Demat ac is to hold all the shares that you have bought or dematerialized (converted to electronic format physical shares) and to make trading easier for you. 

What is Demat Account
what is demat account

What is the Meaning of a 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 format. 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 dematerialized account.  Also, through demat account investors can perform intraday trades.

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. A demat account helps convert physical shares to electronic form.

What is the Use 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 the costs of holding shares in the form of physical share certificates 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. A Demat account holds shares and securities in electronic form. Hence making it easy to transact.
  3. No-Risk: Trading through physical securities was always risky with the threat of physical damage, loss, misplacement, or forgery. Demat accounts in india 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 a Demat Account?

There is something important to note here before getting to know how to operate the online 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 transacting and investing in stocks. Demant account holds all the purchased shares while trading account helps you sell and purchase the securities. Hence both demat and trading accounts are necessary for trading online.

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 stock exchanges immediately. 

In case, if the request is to buy. The stock exchanges will find a seller who is selling a specific number of shares. And then forwards the order to clearinghouses to debit that quantity of shares the seller’s demat account. The same is credited into 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 account with Depository Participants of different depositories. You can buy any shares or securities through the Demat account. For instance, many have been struggling to understand how to buy mutual funds online, as mutual fund investments have been one of the best investment options lately. The good news is, you can do all this through an online demat account. Don’t go anywhere else!

What is the Procedure for Opening a Demat Account?

Here is the account opening process for a Demat account

  1. Firstly, decide where you want to open the demat account. Then choose a DP you want to open the Demat account with. You can find many financial institutions and brokerages offering this service. 
  2. Fill up the account opening form and submit it along with the copies of all the necessary documents and a passport size photo. 
  3. Have original documents handy for verification. 
  4. You will receive a copy of the terms and conditions agreement. Go through it. 
  5. A member of DP will get in touch with you and verify the details you have submitted. 
  6. If the application is processed, you will get a Demat account number along with a client ID which you can use for the account online.
  7. You need to pay some account opening charges such as annual maintenance charge and the transaction fee (monthly basis). The fee differs from one to another Depository Participant. Some DPs charge a fat 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. 
  8. 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 online,  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 required. Also, you have to keep originals handy for verification. Here is the detailed list of documents required that are accepted as proofs for opening a Demat account online.

Proof of Identity

  • Voter ID
  • Pan Card
  • Passport
  • 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

  • Passport
  • 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 ac that you need to know about:

Electronic Certificate

You need a bank account, Demat AC, and a trading account to deal with investments. Whenever you purchase equity shares, your ownership for those shares is marked through a certificate, which is available in electronic form. It is called an electronic certificate. 

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 Securities Depository Limited) and CDSL (Central Depository Services Limited). 

NSDL (National Securities Depository Limited) is the largest and oldest depository in India. It is the first depository in India to offer trading and settlement of securities in dematerialized account format. CDSL (Central Depository Services Limited) is the second-largest depository in India. it facilitates account transfer.

Depository Participants DP

The depository participants DP are the fundamental intermediaries standing between the CDs and the Demat account holders. Several banks, financial institutes, and brokerage firms that offer Demat accounts in india to investors are all DPs. 

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. 

Portfolio Holding

A Demat account keeps all your investment holdings such as exchange-traded funds, equity holdings, government securities, bonds, and mutual fund investments. All these together are referred to as portfolio holding. Also, you can access them all through your Demat account.

Consolidation

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. 

Account Freezing

You have the option of freezing your account or specific security for a given period. 

Conclusion

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. Dematerialization has made the overall trading experience more accessible and less time-consuming.  Also, 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.

Published on January 9, 2020