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Gone are the days when traders used to hold the physical share certificates after they bought any company’s stock. Though it gave them a great feel to hold a share certificate physically, the nostalgic feel always came with a lot of paperwork.
But with the regulator (SEBI) coming into picture, it has now become quite easy to trade and hold shares in electronic format, and for that you need a demat account.
So, what is this demat account? And how has it changed the process of trading? Let’s try to understand in a simple manner.
What is a Demat Account?
The word “demat” came from a term called “dematerialisation” which means converting the physical shares into electronic format. So whenever we say demat account, it actually means dematerialised account i.e. the account holding shares in electronic format.
Today you can not buy or sell shares without a demat account, because it is made mandatory by the Securities Exchange Board of India.
When you buy or sell any stock, the shares get credited and debited respectively to your demat account. Therefore, demat accounts have made the entire process of stock trading very easy and efficient.
Types of Demat Account
You as an investor can open demat account of following types:
- Regular Demat account: Regular demat account is available for all the citizens of India.
- Repatriable Demat account: NRIs can open these types of accounts. One can transfer money from outside India through repatriable accounts once it is linked to an NRE bank account.
- Non-repatriable Demat account: These accounts are also for NRIs but here funds cannot be transferred from abroad. The individual to own and operate this demat account has to link an NRO bank account.
With a demat account, you are also needed to open a trading account for buying and selling securities. Trading accounts are regulated by the SEBI, while demat accounts are regulated by respective Depositories and Depository Participants.
Benefits of Demat Account
Here are some of the key benefits of opening a demat account:
Now when you do not hold shares physically but in electronic form, there is no risk of theft, forgeries, damage of shares (like in case of physical certificates).
2. Odd Lots:
In case of physical certificates, only specified quantities were traded and you were not able to deal in odd lots or single security. So, demat accounts solved all these kinds of problems for us.
3. Easy Trading and Holding:
After demat accounts came and everything was done in electronic form, the trading and transfer of shares became faster and safer. Transactions get executed very smoothly when you transfer your holdings through a DIS (Delivery Instruction Slip) or RIS (Receipt Instruction Slip) for buying or selling. Moreover, it is convenient to hold securities and keep track of performance through one single account.
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4. Lower Costs:
As mentioned above, physical transfer of shares included a lot of paperwork, handling charges, stamp duty, etc. But now, you can trade with lower costs with your demat account eradicating all unnecessary cost, time, and resources.
5. Multiple Access Points:
As you have to operate your demat account electronically, it means you can operate it from any device you want i.e. laptop, PC, smartphone, or a tablet.
Why do we Need a Demat Account?
Though the conversion of physical securities into electronic form is optional, it is more difficult to buy, sell, and manage. You will not be able to find agents and buyers for physical share certificates as everyone is now willing to deal in electronic form only.
Therefore, a demat account is always recommended so that it becomes easy for you to find buyers and sellers, and monitor your securities.
Features of Demat Account
1. Easy Transfer of Shares:
As also mentioned above, the traders can easily transfer their holdings through DIS or RIS for buying and selling shares. Both of these slips provide all the details required for executing transactions smoothly.
2. Pledging Securities:
You can also avail facility of loan against the securities in your demat account. The securities act as collateral when you want to avail loans, and if in any case you are not able to repay, the securities are sold for recovery.
3. Faster Dematerialisation & Rematerialisation of Securities:
If you have a demat account, you can provide instructions to your DP (Depository Participant) for converting physical certificates into an electronic form. Also, in case you require physical certificates instead of electronic securities, those can also be rematerialised.
4. SPEED E-Facility:
NSDL (National Securities Depository Limited) as a depository allows traders to send instruction slips electronically to the DP, instead of Physically submitting. So the process has become more simple, convenient, and less time consuming.
5. Freezing Your Demat Account:
If required, you can also freeze your demat account for a certain period. So similar to your bank account, it is useful if you want to prevent unexpected credit or debit into your demat account. You can also exercise this option for specific quantities of securities held in your demat account.
6. Corporate benefits and actions:
If companies offer refunds, dividends, or interest to its investors, these kinds of benefits are automatically credited to your demat account. In addition to that, actions like bonus, right shares, issues, or stock split are also updated in the account of all shareholders.
How does a Demat Account Work?
Both the Depository and Depository Participants are involved in demat accounts. Your portfolios are managed by the depositories while the DPs act as an agent between the depositors and investors.
DPs process individual customer requests and handle them. They also oversee transactions for the investment and provide suggestions to the customers.
NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) are the two Depositories in India, while all the brokerage firms and numerous commercial banks are depository participants.
How to Open a Demat Account?
To open a demat account, you can simply register with any of the brokers. You just have to fill an application form and submit it along with the required documents:
- Proof of identity
- Proof of address
- Proof of income
- PAN Card details
After submitting the application form with documents, the verification is done by the broker. Once your documents are verified, you will receive a unique client ID and account number along with password.
Once you complete the online process to open a demat account, you will receive a letter from the depository containing demat account number details. CDSL issued account number has 16 numerical digits, while NSDL issues a similar 16-digit numerical value account number preceded by ‘IN’.
Demat Account Charges
Although the depositories offer free demat accounts, still there are some charges that are levied for smooth operations. Every stockbroker offers a unique pricing structure. Below are some basic charges listed:
Annual Maintenance Charges (AMC):
Almost every broker charges you an annual maintenance fee for your demat account. Though these charges differ from broker to broker, they must fulfill the guidelines laid by the depositories.
After SEBI has revised the rates, no broker can charge you AMC fee for debt securities upto Rs. 1,00,000, while for between 1 lakh to 2 lakh, AMC fee must be a maximum of Rs. 100.
Demat charges are levied against services for digitization or physical prints.
The custodian fee is annual or one-time fee charged by the Depository partners. These are directly paid to the NSDL or CDSL by the company.
You may also like to have a look at Best Demat and Trading Account in India
Hope this has cleared all your doubts and gave you a basic understanding about demat account, its benefits, and working. If you are preparing an informative report on demat account, this would have definitely helped you out. So, don’t forget to share this post with you friends!