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 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 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.

What are the Types of Demat Accounts?

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 – for investors residing in India
• Repatriable Demat Account – for NRIs where fund transfer abroad can happen. This account requires an NRE account associated with it. 
• Non-Repatriable Demat Account – for NRIs, under which funds cannot be transferred abroad. This account requires an NRO account associated with it. 

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 trade settlements happen 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 credits 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. Upon successful processing, 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 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 Charges

Opening a Demat Account may be free, but it is important to know all the charges it attracts. Following are the different costs that the Depository Participant charge:

Demat Account Opening Charges

DP’s used to charge a one-time charge to open a Demat account. However, recently most of the Demat accounts are free, i.e., no account opening charges. Banks and brokerage houses offer combo accounts that include savings, deposit and Demat accounts. Thus, opening a Demat account comes free of cost. 

Custodian Fees

Custodian fees were popular when securities were stored physically. However, all the new Demat account holdings are free from physical storage. Some DPs still charge a nominal custodian fee. Custodian fees often depend on the number of securities held in the Demat account. The fees range between INR 0.5 to INR 1 for each International Securities Identification Number. 

Annual Maintenance Charges

Every year, DP’s charge annual maintenance fees. The charges depend on the number of transactions per year. The charges can either be fixed or vary depending on the number of transactions. Most DP’s have a flat fee that they charge and usually waive off the first-year annual maintenance charges. Thus, the fees start from year two. Additionally, investors must also pay the GST (monthly, quarterly, or annually) depending on the DP’s rules. These GST charges are different from the annual maintenance charges. 

Transaction Charges

Every transaction attracts transaction charges. It can either be a flat fee or a percentage, depending on the DP. Thus, transaction charges vary from one DP to the other. Investors must be aware of the transaction charges before completing a transaction. The range is usually between INR 1.5 to INR 20, depending on the trade volume. 

Dematerialization and Rematerialization Charges

Dematerialization happens when physical share certificates are converted into digital records. While rematerialisation is converting digital records to physical certificates. Both these processes come at a cost. 

In addition to the above charges, DPs charge nominal fees for postal/ courier services, re-issuance of delivery instruction booklet (DIB), 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 depositories, there are many financial institutions that offer demat accounts. It is often confusing for the investors 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 happen 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:

• Step 1: Visit the CDSL portal.
• Step 2: Under the ‘Quick Links’ tab, select the ‘Login’ option.
• Step 3: Enter PAN number to proceed
• Step 4: Next, enter the Demat Account Number.
• Step 5: Enter details such as date of birth and captcha to proceed.
• Step 6: Submit and enter the OTP sent to the registered mobile number to log in.
• Step 7: 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 investor holds. 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 the investor holds. 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.

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 to Close Demat Account?

To close your Demat account, you must fill out the ‘Account Closure’ form and submit it at the Depository Participant’s (DP) office. DP can be a bank or investment bank. Upon submitting the closure form, it may take up to 7 to 10 working days to complete the account closure.

Is a Demat Account Required for Mutual Funds?

It’s a popular confusion among investors whether a demat account is mandatory for investing in mutual funds. A demat account is mandatory only for stock investments. Thus, a demat account isn’t necessary for investing in mutual funds. You can invest in a mutual fund through the fund house, brokers/ intermediaries, or online platforms. Similarly, you can invest in mutual funds through a demat account. However, it is not mandatory to have a demat account for investing in mutual funds. 

Recently, investing in mutual funds through the non-demat (net banking) route has become quite popular amongst investors. Earlier, it was compulsory to have a demat account for mutual fund investing. Furthermore, transactions through a Demat account attract additional costs like transaction charges and annual fees. Thus, a demat account for mutual funds is not the most preferred way of investing. 

Investors can easily track their investment’s value as fund houses share the investment statement on a regular basis. The investment statement contains details such as current holdings, current value, purchase value, number of units, etc.

Demat Account Glossary

Following are some of the jargons associated with Demat account 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 you can use for all investment transactions. 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. 

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.

READ MORE

• What is Trading Account?
• What is Equity Investment?
• What is Liquid Asset?
• What is Nifty Bees?
• What is XIRR?
• What is Bond?
• Can NRI Open Demat Account?
• Custodian in Mutual Fund
• Basics of Stock Market

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