Understanding Demat Accounts

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Traditionally, the stock markets operated as open-cry platforms where traders shouted buy and sell orders. Additionally, money was exchanged for physical share certificates resulting in extensive paperwork. It also led to longer settlement times, thereby making the entire procedure cumbersome.

Technology changed this trading system when dematerialization was launched in 1995. In this procedure, physical certificates were converted to the same number of electronic securities and credited to the investors’ demat accounts.

You may be thinking what is a demat account. In simple terms, dematerialization (demat) accounts are similar to bank accounts and are used to hold all your shares in an electronic form. In addition to shares, you may hold other investment products like government securities, exchange-traded funds (ETFs), bonds, and mutual funds. If you want to trade in the stock market, it is mandatory to have a demat account.

Let us now understand how to open a demat account:

Select a depository participant (DP)

There are two primary service providers namely the central depository (CD) and depository participants. DPs are intermediaries between you and the CDs. Brokers, banks, and other financial institutions generally play the role of a DP. You may select one of these service providers to open your demat account.

Submit the application form and required documents

You must submit a duly completed demat opening application form along with the necessary documents and photographs. The primary documents needed for opening an account include a photo identity and residential proof. Original documents may be required for verification.

Go through personal verification

The DP will provide you with an agreement listing all the terms and conditions along with the applicable charges. A personal verification where a representative would contact you for verifying all the details is undertaken.

Open the account

On successfully verifying the information, the DP will offer an account number or a unique client ID. These details are required to access your demat account.

For operating and maintaining the demat account, you need to incur certain fees and charges. These include annual maintenance and transaction fees. It is recommended you check these charges before going ahead with the application procedure.

To buy and sell shares on the stock exchange, you will need to open a trading account with a brokerage firm. These firms levy brokerage fees, which may be based on per transaction or linked to the transaction value subject to a certain minimum amount.

A brokerage fee compensates the brokers when they execute transactions on your behalf. A common misconception is that you lose money on stock markets due to these fees. However, stock investing losses often result due to incorrect investment decisions. You may reduce such possibility when you have access to the right information.

Here are three benefits of opting for a reliable brokerage firm:

Research reports

To earn profits from stock investing a research support is required. It is possible that you do not have the required technical knowledge and expertise to conduct detailed research. A reliable broking firm hires a team of professional experts for such purposes. You get access to these reports and also receive alerts to help you make the right investment decisions.

Portfolio tracking

A brokerage firm enables you to keep track of all your investments in various instruments. The demat account offers the convenience of tracking derivatives, shares, and mutual funds in a single place.

Capital gains reports

When you trade in the stock market, there are capital gains tax implications. A brokerage firm offers reports based on your buying and selling orders. This will help you determine your tax liability.

Brokerage fees are levied by brokerage firms to execute transactions between sellers and buyers. You may open a demat account, select a reputed brokerage firm and choose a brokerage plan that suits your requirements.

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