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What is a Demat Account?
In the past, when you bought a company’s shares you were provided physical shares certificates from the stock exchange bearing your name. A lot of the record-keeping was also done in hard copies, and every time a buy or sell transaction was done, more paperwork ensued.
Published on 01 March 2023
To do away with all this clutter, the Demat Account system was introduced in 1996 to replace the physical certificates. Demat, short for dematerialized, is exactly what the name suggests. A digital repository for storing all your shares in an electronic form.
Also Read: Steps of Purchasing and Selling of Shares Through Demat Account
To draw a comparison, the demat account is similar to a normal savings bank account but for your shares and other tradable holdings. This account contains transaction history, credits, debits, current balance et al. It is mandatory to hold a demat account for trading or investing in the stock market. As per a report by Business Line, there are around 6.9 crore demat accounts in India, which simply goes on to show the tremendous popularity of trading and the trust people have in the demat account apparatus.
Why Do You Need A Demat Account
Well, quite simply, because it is a mandatory requirement if you want to indulge in buying or selling of securities of any nature or hold shares on a delivery basis. The following types of financial tools can be held in a demat account:
- Shares and Stocks
- Non-Convertible Debentures
- Bonds and Other Government Securities
- Exchange-Traded Funds (ETFs)
- Gold in Electronic Form
- Mutual Funds traded on the stock exchange
How To Get A Demat Account
Well, quite simply, because it is a mandatory requirement if you want to indulge in buying or selling of securities of any nature or hold shares on a delivery basis. The following types of financial tools can be held in a demat account:
Step 1 - Carefully select a reliable Depository Participant (DP) with whom you would like to open a demat account.
Step 2 - Fill all requisite details in the account opening form and attach proofs
Step 3 - Complete your KYC verification with the requisite documentation.
Step 4 - Some DPs may conduct an In-Person Verification, to verify the details provided in the account opening form.
Step 5 - Once the application is successfully processed, you will get a demat account number also known as beneficiary ID.
Points to Remember:
- A demat account can be opened even without possessing any shares.
- There’s no mandate to maintain a minimum balance.
- An annual maintenance fee may be involved for maintenance of your account.
- Transaction fee may also be charged when buying/selling via your demat account.
- Also, a separate fee is chargeable for dematerialisation of existing physical shares into digital form.
- Hence, it is very important to read all the material and understand all applicable charges from your DP before opening the account.
Features of a Demat Account
1.Transfer of Shares - A demat account is used to transfer shareholdings of an investor. This transfer is very quick in the electronic form and is typically achieved in 2 days as compared to the weeks it used to take earlier in the pre-demat era.
2.Dematerialization and Re-materialization - The whole concept of demat account is to store shares and certificates digitally. With a demat account, you can easily get your erstwhile physical share certificates converted into electronic form. Conversely, you can get the electronic securities converted back to the physical form as per your requirements.
3.Freezing Demat Account - Demat account holders have the option to freeze their accounts for a specific duration, as per the requirement. It is done to avoid any unpredicted debit/credit into the demat account. To avail the freezing option, the account holder needs to hold a specific quantity of securities in his/her account.
4.Speed e-Facility - The NSDL and CDSL keep offering various benefits and facilities for the demat account holders. Instead of physical submission of the instruction slip, the account holder may send them electronically to the DP thus making it faster and smoother to avail them.
Benefits of a Demat Account
- Reduced Risk –Earlier, shares used to exist as physical certificates in hard copy. Demat eliminated this and made it possible to save all your shares in the electronic form thereby significantly reducing the risk of theft, loss, damage or tampering.
- Reduced Costs - The same concept as above of not needing physical certificates also resulted in a reduction of all charges related to stamp duty, registration, handling, etc.
- Single Account, Multiple Securities - Other than your shares, you can easily manage many other tradable securities and commodities with a single demat account.
- Quick Decisions – The demat account provides runtime visibility on your entire portfolio linked to that account. Moreover, it is digitally accessible from anywhere in the world through any web-enabled device. This enables you to make smart decisions about your buying and selling positions.
- Instant transactions – During those times when shares were traded in the physical form, the complete transaction would take several days to complete. However, with a demat account, the turnaround time is significantly shorter thus realizing your gains at the earliest.
- Automatic Updation of Corporate Actions -There are many instances when the issuing company declares dividends, interest or bonuses of sorts, or announces other structural changes. The advantage of a demat account is that it automatically gets reflected and apportioned over the volume of shares you have in your account, without much manual intervention from your side.
- Loan facility - The securities held in your demat account can give you access to a variety of loans from the bank. You can pledge these securities as a collateral to secure a loan from your bank.
Also Read: Use of a Demat Account
Through this blog, we hope we have been able to demystify the concept of a demat account. We also hope that you are now sufficiently informed to reap the rewards of opening a demat account and getting started on your trading journey.
