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Without a Demat account, it is almost impossible to trade in the stock market. A Demat account can be compared to a bank, where the difference is that it stores securities while a bank stores all the money you have. Multiple securities can be stored in a Demat account, providing a safe place to store everything digitally. The various securities you can store are:
- Equity, i.e. shares or stocks of a company
- Bonds and Debentures
- Sovereign Gold Bonds
- Exchange Traded Funds
- Government Bonds
- Mutual Funds
- Tax-free Bonds
- Certificates of Deposits
Before using one, understanding what is meant by a Demat account can be extremely helpful.
Table of Contents
Meaning of Demat Account
A Demat account is an account in which you can store different securities safely. Demat is an abbreviation for dematerialisation. Dematerialisation is the process where physical security is converted into electronic form. They are provided and managed by depositories who take the latest safety precautions, ensuring all accounts are safe. In India, two depositories are responsible for all accounts.
National Securities Depositories Ltd.
The National Securities Depositories Ltd., also known as NSDL, is the oldest depository in India and was established in the year 1996. It led to the trading revolution, which enabled investors to carry out electronic trading.
Central Depository Services Ltd.
Central Depository Services Ltd. (CSDL) is the first listed depository on the Indian stock market. It primarily operates in the Bombay Stock Exchange and is a reliable depository.
An investor can not open a Demat account directly with a depository. For this, a trader must approach a depository participant or DP. A DP can be a bank, a stockbroker, or an NBFC (Non-Banking Financial Company) that provides traders with the service to open a Demat account. Based on what’s convenient, you can approach any one of these entities, and they will help you to open a Demat account.
Importance of Demat
Demat helps to store securities online safely and securely. Shares are credited and debited from your Demat account when you trade in the stock market. The transfer of shares is a seamless process and is done in a very long time. In previous times, when the Demat account did not exist, there were many trading malpractices that used to take place, which were difficult to eradicate. The settlement period back then was 14 days, and there was a high chance of shares being lost or damaged in the process. Therefore, there was a high probability of theft, and keeping securities safe was a primary concern.
With the help of depositories, a Demat account could eliminate most of the drawbacks which traders had with the stock market. Safety was a priority, and the settlement period was also reduced. As the trading process was made safer, it encouraged more traders to participate in the Indian stock market. With the help of the Demat account, one can quickly check their portfolio and make changes to it. Your account must be linked to a trading account which facilitates all your trading actions. Corporate actions are done without much hassle, as it’s easy to track who all have the shares and bonuses and to whom dividends can be issued without much hassle.
Benefits of a Demat Account
A Demat account has provided various benefits to traders, which are as follows:
- Shares are transferred quickly as all transactions happen electronically.
- The settlement period is T+2, ensuring that shares are delivered within two days of purchasing and sellers receive their money in the same time period.
- Multiple securities can be stored.
- A safe way of storing all securities, eliminating robbery or theft.
- As shares are in dematerialised form, forgery and other malpractices are eliminated.
- Shares are not damaged during the delivery process.
- Fees like postage fees, stamp charges, etc., are eliminated.
- Portfolio management is easy, as one can check shares at any time and easily change them.
- Adding beneficiaries and nominees is easy and can be done through a simplified process.
- Corporate actions like the credit of share splits, bonus issues, dividends, etc., are done automatically without any issues.
How Does the Demat Account Work?
Now that you have learned what a Demat account is, you must now learn how Demat accounts work. But first, you need to open a Demat account. You need to fill out an account opening form with a DP and provide your PAN card, address proof, and bank account details.
The DP will verify your details and open a Demat account in your name, which will have a unique account number. Now, all your share certificates will be converted into electronic format and credited to this Demat account. You can buy, sell, or transfer securities through this account electronically without handling any physical certificates. Your DP will keep a record of your holdings and transactions and provide statements. A Demat account helps avoid risks related to physical certificates like loss, theft, forgery, etc. and makes managing your investments convenient.
On your Demat account, you can get periodic statements from your DP on the holdings and transactions made through the account. It provides an easy way to monitor your portfolio. Knowing the basics of a Demat account makes investing easy. Now, you can explore different types of investment in the stock market.
Types of Demat Account
Based on your citizenship status and how you use it, there are three types of Demat accounts.
Regular Demat Account
It is the standard Demat account that any Indian citizen can use to invest in the stock market. With the help of 2-in-1 or 3-in-1 account services, the transfer of funds and securities happens safely.
Repartriable Demat Account
The repatriable account is utilised by non-resident Indians (NRIs) and enables them to transfer money abroad from the account. This account must be linked to an NRE (Non-Resident External) bank account to be fully utilised.
Non-Repatriable Demat Account
An NRI uses this account, with the drawback being that the funds can’t be transferred abroad. An NRE account is required to open a non-repatriable account, which enables all NRIs to have a trading opportunity in India.
How to Open a Demat Account
Once you understand the Demat account meaning, you can go ahead and open an account to trade in the Indian stock market. Without one, it isn’t possible to trade in the stock market as the Securities and Exchange Board of India (SEBI) makes it mandatory for a Demat account to trade in stocks and equity. However, to open a Demat account, there are certain steps one must take.
Choosing a Depository Participant
A DP bridges the gap between you and the depository, enabling you to open a Demat account. You can approach any DP, whether a bank, an NBFC, or a stockbroker. A stockbroker is an optimal option due to the multiple features they provide, along with additional services that traders can benefit from. Choosing the right stockbroker can make a big difference as they’re influential and can drastically impact your trading experience.
Share India has been a pioneer in algo trading and the frontrunner in providing algo-trading facilities to high-net-worth individuals and NBFCs. Share India helps investors open a Demat and trading account in four easy steps. First, it’s a completely paperless process, saving lots of time and effort to open an account. Get multiple trading strategies that you can use to enhance your trading.
Fill Out the Form
Once you choose a stockbroker, fill out the account opening form. This would also contain the Know Your Customer (KYC) form, where you enter all your details and additional information.
Upload Documents
After filling out all the forms, you will have to share your documents, which will be verified with the details you have provided. This includes documents like an Aadhaar card, PAN card, passport, etc.
Approval
Along with the above steps, you’ll have to do an E-sign for verification purposes and might also have to complete Aadhaar verification through OTP. After all of these, your Demat account will be opened, and you will receive a welcoming letter from the depository informing you about your Demat account opening. You can go ahead and start trading once the process is complete.
Conclusion
A Demat account is extremely useful and also a safe way to store the different securities you can own. Learning what the Demat account means can be extremely helpful in using it to its full potential.
You can now make an informed decision and open a Demat account online. Platforms such as Share India offer flexible and advanced trading tools. Open a Demat and trading account with Share India to enhance your investment journey. Joining Share India can be extremely helpful in multiple ways.