Demat Account is basically an electronic account where all your shares are stored in a dematerialized format. There was a time when people used to buy shares from the stock market and keep those in respective files. With the advent of digitization, online trading came into play and certainly impacted the way shares were stored by traders and investors.
When you place a buy trade in the exchange, in lieu of the monetary amount you pay, you get shares credited to your demat account. Once you sell these shares, the corresponding number of stocks are deducted from the same demat account.
Apart from shares, you can store other investment products such as ETFs (Exchange Traded Funds), Mutual Funds, Government securities, Bonds etc.
Different stockbrokers levy different Demat account opening charges as well as Demat account maintenance charges as well. Where Account opening cost is going to cost you once, annual maintenance charges or AMC is a recurring cost that needs to be paid on a yearly basis.
These demat accounts are basically provided through either of the two regulated depositories CDSL or NSDL. Different stockbrokers or depository participants have memberships with either one or both of the above-mentioned depositories.
Demat Account Basics
A Demat Account is like your bank account.
Like the way, you store your money in a bank’s savings or current account in a non-physical or electronic form. In a similar way exactly, the shares you buy from the stock market, stay in your demat account in an electronic format.
Here are some of the basics related to a Demat account that you must be aware of. Some of those are listed below:
A Demat Account is linked to your PAN Card.
You can open any number of Demat Accounts with different stockbrokers, although there are pros and cons to this action depending on your trading style.
There is always a unique identification number linked to a Demat Account that basically differentiates you from other investors in the stock market.
Not every stockbroker has a provision to open your demat account directly. At the backend, such stockbrokers have partnerships with other depository participants that actually open your demat account.
Shares can be transferred from one Demat account to another.
There is no requirement of opening your demat account with a minimum number of shares or even keep a minimum shares balance in your account.
Here is a detailed video on some of the basic queries around a Demat account:
Objectives of a Demat Account
The objectives of a demat account are pretty straightforward in nature. Here are those listed below:
This account must hold all the shares in an electronic or dematerialized format.
An investor may choose to hold not just shares but also mutual funds, ETFs, Government bonds, securities.
Safety and security provided to the stocks stored in the account and keep those away from risks such as theft, loss or damage.
Provide an easy online mechanism to view, transfer, sell or buy different investment products through a single account.
A lot about the objectives and reasons to open a demat account has been mentioned here and in the sections above. In rest of this article, we will talk about the process, documentation, advantages and disadvantages related to the demat account.
How to Open a Demat Account?
Here are some quick steps on how you can open a demat account for yourself:
You will be provided with an account opening form from your stockbroker. Some of the basic details such as name, address, contact information, requisite signatures will be needed from your end to be added to this form.
The executive of the stockbroker you have chosen will be providing you with demat account agreements, information on payments and charges to be paid, power of attorney document. You are advised to read, verify and sign on these documents before providing it to the broker.
You will be required to pay an account opening fee which is a one time cost. Furthermore, there will be an annual maintenance charge that is levied on your account. Make sure to check these details before going ahead with account opening.
Once the documents are validated by the broker, there will be a parallel in-person verification done either through a physical meeting or via an online call by Whatsapp or Skype.
After all the above documents and processes are taken care of, you will be assigned a unique Demat account number by your stockbroker that will work as an identifier for your account.
For the records of the stockbroker, you will be assigned a client ID too.
You will also be provided with login credentials of different trading platforms such as a mobile trading app, terminal software etc which you will need in order to place your trades in the stock market.
In order to open your demat account with a regulated depository participant, you need to provide the following documents to the stockbroker you have selected for your trading:
Address Proof (any of the following)
Verified Electricity bill
College ID card with Hostel address (for students) where college must be affiliated with universities & education boards such as ICAI, ICWAI, Bar Council.
Passport Sized Photo
Cancelled Cheque from a bank account in your name
Income Tax Return (need to be checked with respective stockbroker)
Along with these documents, you will need to fill in account opening form as well as sign the Power of Attorney (POA). Make sure you keep a copy of all the forms you sign along with dispatching it to the broker. The broker must share this copy with you as a part of its professional responsibility.
You will need to show the original documents to the executive of the broker for validation and then provide signed copies of these documents.
Dematerialization is basically a process of converting the physical shares into an electronic format. The term “Demat” account actually is a shortened version of “Dematerialized” account where the shares can be accessed through an online medium.
Furthermore, it is not only the storing of those shares is done in an electronic format but even the buying and selling of these shares happens online.
It is like depositing your hard cash physical money into your bank account and accessing it online for your shopping, flight ticket booking and so on. While you are not paying the third party with physical cash, you are certainly crediting money in electronic format to their respective accounts.
Yes, like a bank account you can get the shares back into a “materialized” or physical format again (from a Demat account) but the process in case of shares materialization is way more cumbersome than getting the money out of an ATM.
Various Types of Demat Account?
There are different types of accounts that you can look forward to, depending on your trading preferences and investment classes you look to put your money into.
These accounts can be:
a Basic Services Demat Account (BSDA)
Commodity Trading Account
A BSDA or a basic services demat account comes with basic provisions with limited customer support and no research.
However, the demat account offered by full-service stockbrokers come with an exhaustive level of services where you are provided with tips, research and recommendations along with quick customer support, wide investment products range and offline branches. However, such accounts are going to be relatively heavy in your pocket.
Trading Account helps you in buying and selling shares from and to the share market.
If you are specifically looking to trade just in commodity segment, then you need to open a commodity trading account only.
Charges for all these accounts are charged separately at both account opening and maintenance levels.
How to Use a Demat Account?
There are several things that you need to take care of, while you manage your demat account. Initially, you might find this to be a cumbersome process, but with time – you will start getting into the groove of managing these basic areas.
Now, first and foremost make sure that you read the terms and conditions mentioned in the Demat Account Opening form. It may sound boring but give it an hour or so while you read every little detail that is put in there. There might be some terms that you do not understand and find against your trading preferences. It will be better if you clear out those confusions with the executive of the broker in order to avoid any bigger mistakes later.
Furthermore, there will also be a POA (Power of Attorney) document that will come with different clauses. Now, some of these clauses are pretty generic in nature while few of them may have repercussions. Thus, again make sure you read out the whole document and sign only in those areas that you feel comfortable with.
Few brokers have the tendency to play with the language written in the POA and then the trader or investor might feel cheated later. For instance, a broker may put in a clause of providing no DIS slips to the trader, while few may take it to the level where the trader will not be able to operate his or her account at all. The complete account will be under the operations of the broker itself.
Thus, to avoid any of such instances, it’s better to be safe and sorry. Read the complete document for your own good, sign on the areas you understand and are in agreement with and take clarifications on the aspects of the POA that you don’t understand before signing.
Check out this detailed video highlighting the use of a demat account and related POA clauses:
Benefits of Opening a Demat Account
Like mentioned above, Demat account is completely online in nature and takes away a lot of hassles from your investments in the stock market.
Here are some of the top benefits of opening a demat account:
Your life becomes easy when the shares you bought are saved in an electronic format
Securities can be transferred easily and quickly
Easy to maintain your securities, bonds, ETFs in dematerialized form
No paperwork involved in the maintenance, buying or selling of these shares stored in your demat account.
Transfer of securities requires no stamp duty along with savings in the transaction charges as well.
Odd lot problem gets taken care through a demat account where you can buy or sell even 1 share.
No risk of theft, robbery or any wrongdoing to your shares in the demat account.
Transfer facility is much easier in case of death of an original account holder.
The closing of a Demat account is relatively easier as well.
Looking at the whole picture is important and that is why here we are going to discuss some of the concerns that you might face (and probably don’t understand as of now) while using a Demat account:
While you can open a bank account without a PAN Card, it is a mandate when it comes to a Demat account.
You need to understand how to make the best use of trading platforms on either a mobile phone or a laptop/desktop. Putting an order through call and trade facility is time taking and impacts the final profit you take away.
Investors and traders must understand specific terms and conditions laid out the broker and not blindly sign on anything that is asked of them.
Few stockbrokers always look for loop-holes in the system and play to their advantage against their clients. Thus, be wary of the fact that you go with a prominent or a recommended stockbroker.
So, that covers up our basic tutorial on “What is a Demat Account?”.
Read our other tutorials on Demat Account to improve your understanding of the concept.
Furthermore, if you are Interested to open an account?
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