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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 it 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. It helps convert physical shares to electronic form.

Why do you need a Demat account?

A demat account holds shares and securities, just like a bank holds the savings of a person. It holds securities in dematerialized format or electronic format. A demat account is necessary when an investor wants to trade in securities on a delivery basis. If the investor just wants to trade in futures and options, a demat is not necessary. However, all trades are settled through a demat account, and hence it becomes mandatory to have a demat account. It is necessary to store and monitor all financial securities in one place.

Also, this account is much safer when compared to a physical certificate of a share or financial security. There is no risk of it being lost or misplaced. This account can be accessed from anywhere as it is online. Through a demat account, one can purchase odd lots of shares, which wasn’t possible through physical certificates. Moreover, shareholders holding shares in demat format are eligible for the right issue, bonus issue, and dividends, if any.

What is the Use of Demat Account?

Below are the four major features make you understand the need of a 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. It 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 does the Demat account work?

Opening, managing and using a demat account is very simple. A demat account is always linked to a trading account and which is in turn linked to the account holder’s bank account. To start trading in the stock market, one has to first transfer some funds to the trading account.

After adding the funds to the trading account, one can place an order to purchase the shares. Upon successful execution of the order, it takes T+2 days for the share to reflect or get transferred into the investor’s demat account. Also, as trading and demat accounts are closely integrated, the entire process of investing happens swiftly and seamlessly.

Likewise, investors can share in their demat account by placing a sell order through their trading account. The money gets credited to the investor’s bank account.

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 invest in 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 and invest in different types of investment in mutual funds. 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. 

How to Select Best Demat Account for Trading

A demat account is necessary to purchase and store financial securities. It holds all the investments in electronic form. Two depositories in India maintain a demat account. They are the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

The first step to selecting a demat account is to choose a depository. Investors can choose either the NSDL and CDSL. After choosing a depository, the investor must choose a demat account. Unlike the depositories, there are many financial institutions that offer demat accounts. Investors often get confused as to which one to choose. Hence, we have curated a list of things to keep in mind before choosing a demat account.

Ease of opening the demat account

SEBI has given a detailed procedure for opening a demat account. Demat account providers should follow all the rules and regulations mandated by SEBI. However, they can ease the account opening process by allowing investors to do their e-KYC online. Any verification can be done through both online and offline modes. Hence choose a bank or financial institution that offers demat account with minimal and easy procedures. Also, consider the time taken to open the demat account. For online verifications, it shouldn’t take more than two days, and for offline, the maximum limit is five days.

Expenses and maintenance charges

A demat account has multiple charges like account opening charges, account maintenance charges, trading charges. Some brokers even charge for additional services. For example, if an investor wants a physical copy of the demat account holding, then the broker will charge for the physical copy. Therefore, investors need to know all the charges involved with a demat account. Also, they should choose a broker who offers low account maintenance and trading charges.

Software interface

A demat account and trading account are linked to the bank account to facilitate trading and investing online. Hence it is a seamless interface between the bank and demat account. The brokers should be able to provide multiple ways of accessing a demat account, for example, through a website or an app. Some banks also offer demat and trading accounts, called the 3 in 1 account and there are also 2 in 1 accounts. These accounts help facilitate the transfer of money from the bank account to the trading account and vice versa smooth. Hence choose a demat account that makes online trading seamless and effortless.

Reports and analytics

Demat account offers analytics about profitability, diversification, valuation, and direct call to action for traders. These reports will help make important investing and trading decisions. Hence an investor or trader should choose a demat account that offers all these services at no additional cost.

Additional services

Demat account providers are offering their clients additional services to differentiate themselves from other brokers. Quick customer service and recommendations about the purchase and sale of securities etc. have become more valuable for leading on the customer service front. Hence, investors have to gauge brokers based on how approachable they are in the time of need and consider other additional services they offer before choosing a broker.

How to read a Demat account statement?

A demat account is an account that stores all the financial assets of an investor. For example, demat accounts hold shares, mutual funds, bonds, debentures, gold ETFs and other assets in a digital form. The account facilitates easy and hassle-free transactions of buying and selling the assets. It is important to keep checking the demat account statement frequently.

In India, securities purchased by investors are held in two types of accounts that act as electronic depositories. National Securities Depository Limited (NSDL) and Central Depository Service Limited (CDSL).

The Consolidated Account Statement (CAS) is a single document that essentially contains all the investments (equities, mutual funds and other depository accounts) of an investor. One can easily access their CAS by following the below steps:

Visit the CDSL portal.

Under the ‘Quick Links’ tab, select the ‘Login’ option.

Enter PAN number to proceed

Next, enter the Demat Account Number.

Enter details such as date of birth and captcha to proceed.

Submit and enter the OTP sent to the registered mobile number to log in.

Upon successfully authenticating and logging in, one can view and download their demat account statement.

Reading of demat account statement

The following steps will help individuals to read and interpret the demat account statement:

  • Personal Details: Even before looking into the account statement, one should first verify their details.
  • Total Portfolio Value across investments: This is a summary of all investments held by the investor. The sections show the break up across different assets like equity, mutual funds, government securities, etc.
  • Demat Accounts held with CDSL: This section comprises some details of the investor and the Depository Participant (DP).
  • Statement of Transactions: This section shows all the transactions for a specified period.
  • Holding statement: This section is a compilation of all the assets held by the investor. For equities, it includes the ISIN, security name, current balance, frozen balance, pledge balance, free balance, market price or face value and the value of the investments. The statement includes the fund name, folio number, investor details, date, transaction description, amount, NAV, Price, units, stamp duty, opening and closing balance for mutual funds.

Difference between Demat and trading account

Following are the differences between a demat and a trading account:

Functionality

A trading account is used for buying and selling securities. These securities will then get debited into the demat account. While a demat account is an electronic account that allows investors to hold their financial investments online.

Nature

A trading account links the investor’s bank account and demat account. Investors can sell the shares in the market by withdrawing them from the demat account. It acts as a current bank account. While a demat account holds the securities in one place. It acts as a savings bank account.

Role

Both demat and trading accounts may be different. However, both are mandatory to trade on the stock market. When an investor buys shares, they are doing it through a trading account. The money gets debited from the bank account, and the shares are credited to the demat account. Similarly, when the investor is selling his holding, they are debited from the demat account, and the money is credited to the bank account.

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 do it 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. 

What are the types of demat account?

Demat account, also known as dematerialized account, are online accounts that hold shares, bonds, etc. in a dematerialized or electronic form. It helps investors for online trading like buying or selling shares or converting physical shares into electronic form. Although the purpose remains the same for all demat account, there three types of demat account for different investors – 

Regular Demat Account – used by investors residing in India

Repatriable Demat Account – used by NRIs under which funds can be transferred abroad. This account requires an NRE account associated with it. 

Non-Repatriable Demat Account – used by NRIs under which funds cannot be transferred abroad. This account requires an NRO account associated with it. 

Can I open a demat account without opening a trading account?

The purpose of the Demat account is to hold your investments in the form of equities, bonds, ETFs, etc. A trading account is required if you intend to buy and sell equities or futures and options. Usually, brokers open a trading-cum-demat account as both the accounts are related to one another. Hence, there is no obligation for you to open both the demat account and a trading account. 

For instance, if you have applied for an IPO(Initial Public Offering) and just want to keep the shares, then demat would suffice. However, if you wish to sell those shares in the stock market, you would require a mandatory trading account. 

Can we transfer shares from one demat account to another?

Yes, one can easily transfer shares from one demat account to the other. You can do it either manually or online. The share transfer happens through an intra or inter-depository way. Stock transfer from one demat account to another demat account within the same depository is called intra depository transfer. At the same time, the share transfer from one depository to the other depository is called inter depository transfer.

Investors can manually transfer by filling the Delivery Information Slip (DIS) that the broker provides. For online transfers, they can use NSDL ‘SPEED-e’ facility or CDSL ‘EASIEST’ facility.

How to check demat account balance?

One can easily check their demat account balance by either logging into the CDSL portal or the investor’s broker portal.

The followings steps help in determine the demat account balance through the CDSL portal:

Visit the CDSL portal.

Under the ‘Quick Links’ tab, select the ‘Login’ option.

Enter PAN number to proceed

Next, enter the Demat Account Number.

Enter details such as date of birth and captcha to proceed.

Submit and enter the OTP sent to the registered mobile number to log in.

Upon successfully authenticating and logging in, one can view and download their demat account statement.

How is a Demat account different from a bank account?

A bank account holds money deposited in it by the account holder. The account holder can withdraw the money from the bank account from anywhere and at any time. Also, depositing money in a bank account qualifies for saving and not investing.

A demat account is an account that holds financial securities in dematerialized format or electronic format. All the purchases of shares made through the trading account are stored in the demat account. The securities can be sold only during trading hours and can be done only through online mode. All financial securities held in the demat account indicate that the account holder is investing and not just saving.

Can my Demat account be collateral towards loans?

You can pledge the shares in the demat account as collateral for taking loans. Moreover, even though the shares are used as collateral, the investor can still receive dividends from the shares. The loan against demat account shares needs no prepayment, and the interest rates are cheaper than personal loan rates. The value of the shares pledged are assessed on a weekly basis by the bank giving the loan.

For what all purposes can a Demat account be used?

A demat account holds financial securities in electronic format. Hence it acts as a bank account for all the financial investments made by the investor. A demat account holds equity shares, bonds, debentures, government securities, mutual funds, ETFs, etc., in electronic format. All the financial securities can be maintained and monitored in one place. A demat account also saves time by facilitating the quick purchase and sale of financial securities. A demat account has no stamp duty and handling charges like physical trading.

Can I transfer my shares from one demat account to another?

Yes, you can transfer shares and securities from one demat to another. It can be done through manual and online mode. Both the ways require Debit Instruction Slip (DIS Booklet) provided by their Depository Participant (DP).

How to transfer shares from one demat account to another online?

To transfer the shares online from demat account to another, one must visit the CDSL website and click on the ‘register online’ link. Fill the form and print it so it can be transferred to the DP. The DP will verify the details given, and after verification a password will be sent to the registered email ID. Use the password to transfer the shares from one demat to another.

Do we need a demat account for mutual funds?

No, a demat account is not necessary to invest in mutual funds. One can directly invest in mutual funds online through the AMC’s website, or any other online platforms that offer mutual funds.

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.

Frequently Asked Questions

What are the charges of a demat account?

Opening a demat account requires the presence of a Depository Participant(DP). Usually, DPs are brokerage firms or banks that offer opening a demat account with them. In most cases, DP will charge a nominal amount for opening a demat account. Apart from account opening charges, other charges are custodian charges, annual maintenance charges (AMC), transaction charges and demat&remat charges. These charges may vary from one brokerage firm to another. 

How long does it take to open a demat account?

Generally, it takes around 48 to 72 hours to open a demat account post your application. Any discrepancies in the documents or forms submitted would delay the demat account opening process.

How many demat accounts one can have?

Legally an individual can have more than one demat account. However, they cannot have more than one demat account with the same Depository Participant (DP) or broker. Therefore to have multiple demat accounts, they should have the demat accounts with different DPs or brokers. Also, an individual cannot have more than one demat account with the same stockbroker.

How to find the demat account number?

Demat account number format depends on the depository at which the account is registered. If the account is held with CDSL, then in the letter sent by CDSL, the demat number will be mentioned as beneficiary owner ID or BO ID. CDSL will have a 16-digit demat number with all numerical. For NSDL, the letter will be sent by NSDL, and the demat number will also be 16-digit, but it’s an alphanumeric number starting with IN.