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 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.
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.
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.
Below are the four major features of Demat account that make you understand the need of Demat account:
Following are some of the benefits that a Demat account offers,
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!
Here is the account opening process for 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.
Following are some of the jargons associated with Demat ac that you need to know about:
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 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.
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.
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.
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.
You have the option of freezing your account or specific security for a given period.
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.
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.
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.
You can open multiple Demat accounts. However, you cannot open more than one trading account through a broker.
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.
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.
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.
Yes, you can change the nominee by filling up a new nomination form.
It usually takes about 30 days.
There are three types of demat accounts. Each account type caters to different investors.
Regular Demat Accounts: Regular demat account is for Indian citizen who reside in India. With this regular demat account, Indian investors can do their trading.
Repatriable Demat Account: This account type is useful for nonresident indians (NRIs). This account allows to transfer funds back to abroad. For trading, this account requires an NRE bank account.
Nonrepatriable demat accounts: Nonrepatriable demat accounts are for NRIs as well. However, this account type restricts the fund transfers. The account requires an NRO bank account.
Yes, nonresident indians can invest in India by opening a demat account. It allows nonresident indians to invest in Indian securities markets and buy shares. The two types of demat accounts that nonresident indians can invest through are
Repatriable Demat Accounts This account allows to transfer funds back to abroad. Also, for trading with this account, NRIs require an NRE bank account.
Nonrepatriable demat accounts: This type of account restricts the fund transfers. The account requires an NRO bank account.
Transfer of shares from one demat to another can be done either offline or online. Also, transfers of shares happen automatically with demat account transfer.
For Offline transfer, the transfer may be Off-Market Transfer or Intra-Depository Transfer. The account holder has to provide the Debit Instruction Slip (DIS Booklet) to the Depository Participant (DP) for this.
For Online Transfer, the account holder has to register with the CDSL website and fill in all the required details.
The major difference between demat and trading is that a Demat account holds all the purchased shares while trading account helps you sell and purchase the securities. Demat account comes with a trading account linked to it, with unique login credentials. The trading account is used for transacting and investing in stocks. Hence both demat and trading accounts are necessary for trading online.
Stock brokers are registered trading members of a stock exchange. While a sub broker is an agent who is an intermediary between the broking company and investor.
Yes, the demat account shows corporate actions such as stock split, bonus, and dividends. Additionally, a demat account allows investors to study research reports. By which they can take a stock position. Also, they not only allow one to buy shares. They also give updates on union budgets and share news about the company one invested on their trading platform. Moreover, transactions in your demat account are facilitated smoothly under SEBI regulation.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.