Demat account is an account which is used to hold shares and securities in electronic format. These accounts can also be used to build a portfolio of one’s bonds, ETFs, mutual funds and similar stock market assets.
Demat trading was first introduced in 1996 for NSE transactions in India. As per SEBI regulations, all shares and debentures of listed companies will have to be dematerialized in order to transact on any stock exchange from March 31, 2019.
Easy to Use
It provides quick and easy access to all your investments and details through net banking.
Easy Dematerialization of Securities
Depository Participant (DP) helps you convert all your physical certificates into electronic form and vice versa.
Receiving Stock Dividends and Profits
It uses quick and easy methods to get dividends, interest or refunds. All this is deposited into the account automatically. It also uses Electronic Clearing Service (ECS) to update the accounts of investors with stock splits, bonus issues, rights, public issues, etc.
Easy Share Transfer
Transfer of shares using Demat account has become very easy and time saving.
Liquidity of Shares
Demat accounts have made it easier, faster and more convenient to get money by selling shares.
Loan Against Securities
After opening a demat account, one can also obtain a loan against the securities held in your account.
Freezing Demat Account
A person can freeze a certain amount or type of securities in his Demat account for a certain period. This will eventually stop the transfer of funds from any debit or credit card to your account.
How Does Demat Account Work?
In general, Demat accounts are used to hold shares purchased by an individual in-
- If a person intends to buy or sell shares of a certain company, the first step is to log in to the Demat and trading account linked to the bank account.
- When he places a ‘buy/sell’ request in a trading account, the DP immediately sends it to the stock exchange.
- Let us assume that a ‘Buy’ order was placed. The stock exchange will look for a seller who intends to sell his shares. If the price matches, it will be taken to the clearing houses to debit the seller’s Demat and credit the buyer’s physical account.
An important point to note here is that buyers and sellers can maintain a demat account with a DP linked to different depositories.
What Documents Are Required To Open A Demat Account?
- PAN card
- Aadhar card
- Address Proof
- Passport size photos
- ID proof
Demat Account Types
An investor can choose to open any of the following types of Demat account-
Regular Demat Account
All resident Indian citizens are eligible to open regular Demat accounts.
Repatriable Demat Account
NRIs can open repatriable type Demat accounts. One can transfer money from abroad through such accounts, provided it is linked to an NRE bank account.
Non-Repatriable Demat Account
Non-repatriable accounts are also for NRIs, however, these accounts cannot be used to transfer money from abroad. To own and operate this type of Demat account one needs to link an NRO bank account.
Customers having a Demat account need to open a trading account to buy or sell securities from the stock market. While the respective depositories and depository participants regulate Demat accounts, a trading account follows the rules mandated by SEBI.
Benefits of Demat Accounts
Investors who choose to open a Demat account can enjoy a number of benefits. Here are some of the most common benefits.
- The electronic system is also quite simple and can be completed in a few hours. It has eliminated many time-consuming tasks, thereby streamlining the entire process and saving time.
- The electronic system is also quite simple and can be completed in a few hours. It has eliminated many time-consuming tasks, thereby streamlining the entire process and saving time.
- Demat accounts are available with remote access benefits provided one has a net banking facility registered with the concerned financial institution.
- Investors can merge bank accounts with dematerialized accounts to facilitate electronic fund transfer.
- If customers open a demat account online then they can avail the nomination facility.
- Account holders with a specific unit of securities in their portfolio can choose to freeze their accounts for a specific period. This can prove helpful in avoiding any unwanted transactions in one’s Demat account.
Demat Account Number and DP ID
DP ID or Depository Participant ID is also issued to investors by their preferred broking firms or other financial institutions. DP ID forms a part of one’s account number, as it represents the first eight digits of the ID account number.
Both the depository and the depository participant use this data when an investor converts physical shares to demat, transfers shares from one demat account to another, or transfers funds from a demat account to a bank account.
Demat Account Charges
Although any investor can open a free demat account, certain charges are levied on the account to ensure its smooth operation. All brokerage companies (including banks) come with their own unique brokerage fees. Here are some of them-
- Annual Maintenance Fee
Almost every firm charges an annual maintenance fee for the demat account. Depositories follow specific guidelines for calculating the fees applicable to each investor.
SEBI has implemented a revised rate for Basic Services Demat Account or BSDA from June 1, 2019. As per the revised guidelines, no annual maintenance fee will be applicable for debt securities up to Rs 1 lakh, while the maximum is Rs. A charge of Rs 100 can be imposed on holdings of Rs 1 lakh to Rs 2 lakh. - Custodian Fees
Depository participants charge custodian fees in a lump sum or on an annual basis. The amount is paid by the company directly to the depository (NDSL or CDSL). - Demat and Remat charges
Such expenses are charged as a percentage of the total value of shares purchased or sold to cover all digitization or physical printing costs of the securities.
Apart from the charges mentioned above, an investor is also liable to pay charges like credit charges, applicable taxes and cess, rejected instructions charges etc.
Demat accounts play an important role in investing in the stock market, as it is one of the most common ways to invest in the stock market. However, recently, many online platforms offer the advantage of online trading without such accounts.