A Demat account is a repository where the digital copies of your stocks can be stored and managed. In other words, a Demat (abbreviated form of dematerialisation) Account allows investors to hold shares and securities in electronic format, with an aim of facilitating safe, easy and convenient trade for users. It is just like a bank account, the only difference being that when a bank account holds cash, the Demat account holds shares and other securities. Those indulging in online trading in the stock market will find the entire procedure of investing, trading, holding, and monitoring faster, convenient and cost-efficient with use of Demat account. It also allows the investor to buy and sell or hold a whole lot of products, other than shares and stocks, be it bonds, mutual funds, government securities, or exchange-traded funds. All this can be done from the comforts of your home with the click of a mouse, and without any paperwork.
How does a Demat account work?
Working of a Demat account is complemented by two other accounts -- your bank account and your trading account. Else, the role of your Demat account will be limited to that of holding shares, stocks, bonds, mutual funds, equities etc. Trading account is where the actual cash/fund flow happens. Whenever you buy or sell stocks, the account gets debited or credited. Most commonly, a trading account refers to a day trader's primary account. Similarly, your bank account which is linked to Demat and Trading accounts helps you to transfer money to a trading account.
When you buy or sell a particular share, first of all, you need to login to your trading account, which is also linked to your bank account. When a ‘buy’ or ‘sell’ request is put in the trading account for a particular stock, your Depository Participant (DP) forwards this to the stock exchange immediately along with other details. If your request is to ‘buy’, then the stock exchange looks for a seller who wants to sell the same quantity of shares and sends an order to clearance houses to debit the particular number of shares from the seller’s Demat Account and credit it to the buyer’s Demat Account.
What is the use of a Demat account?
There are always chances of shares and stocks getting misplaced, damaged etc in its physical form. A Demat account addresses this safety concern as here the securities are stored in electronic format. Also, to trade in the share market one has to own a Demat account, without which trade cannot be carried out. Other uses of a Demat account are:
Easy Access: Since Demat accounts are completely online, it can be easily accessed online from any part of the world and at any time.
Variety holdings: One can hold various investments like mutual funds, equity shares, bonds and exchange-traded funds under one Demat account, which can be opened even if you don’t possess any shares.
Quick Monitoring: Demat accounts facilitate easy monitoring of the holdings from the comforts of one’s home.
Saves time: With everything in digital format, this online platform makes trading very convenient and less time-consuming. One can buy, sell or transfer funds and securities in a matter of seconds.
Minimal Costs: Unlike physical trading, there are no additional costs of stamp duty, handling charges, etc. involved when you are trading with a Demat account.
Corporate Gains: Dividends, interest, or refunds reach the Demat account holder without any delay. Be it bonus issues, stock split or rights shares, everything is automatically updated in the Demat accounts.
How to use a Demat account?
To start with, you need an active internet connection. Then you have to select a Depository Participant (DP), who will act as an agent to the depository. Apart from filling the account opening form, you will have to keep handy identity proof, address proof, PAN card, and a passport size photograph. Once you agree to the terms of the agreement and the charges, an in-person verification is initiated. Upon successful processing /verification of the application, a client ID or an account number is provided along with a transaction password. Now you can access online your Demat account, which is your storehouse for your shares, stocks, bonds, mutual funds, equities and other derivatives. Apart from some debt instruments like bank and company fixed deposits, most of the instruments can be held in a single demat account. For making better use of a Demat account, i.e. to make a business out of share market, an investor will require a trading account, along with a Demat account, and a Depository Participant (DP) who connects you to a depository. Currently, India has two depositories; National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CDSL).
One of the biggest uses of a Demat account is that you have access to beneficial information, i.e. you will be able to check live share market updates and analyse your different investments. It also ensures that you stay updated and provide share market news related to your investments. The DP will send regular messages related to dividend declaration, results, merger, buyback, and other info. You can access analyst reports based on company performance, financial projections, and historical information to help make informed investment decisions. You can track the performance of your portfolio across different investment products. This enables you to make necessary modifications to suit your risk profile and return expectations. Also, you can set alerts and automatic buy and sell instructions that need to be carried out when the securities reach pre-specified prices.
Important terms & conditions in opening Demat account
One should ensure that the papers are valid as on submission date and that they haven’t crossed the expiry date. Also, the personal details need to be provided in the prescribed format. Most of the brokers/ banks pre-fill them once you provide them with PAN number and Date of Birth. You need to verify and attest them. Your Bank Account number and IFSC code need to be shared for opening a Demat account. You will have to share with the DP two copy passport size photo, Savings bank account- cancelled cheque leaf/ bank statement /passbook with IFSC and MICR printed on it, Pan card details, Aadhar or voter id details and Income proof - bank statement of 6-month transaction (only for F&O).
FAQs
What are the types of Demat account?
There are three types of Demat accounts, cater to different investors depending on their needs:
Regular Demat account: Traders who are Indian citizens and reside in India use this type of account.
Repatriable Demat account: This account is useful to the Non-Resident Indians as it allows fund transfers abroad. It requires an associated NRE bank account.
Non- Repatriable Demat account: This account, too, is for the Non-Resident Indians. However, in this case, funds cannot be transferred abroad, and this account requires an associated NRO bank account.
How can I change my signature in Demat account?
If a Demat account wants to change his signature, s/he should visit the branch for submitting the application. New signature(s) of the holder(s) should be attested by the banker. The Demat account holder should also submit the following documents: Request for change of signature in the prescribed format signed by all account holders; self-attested proof of identity of account holder(s) whose signature is/are to be changed; and reason for change of signature.
Can I link a trading account with Demat account?
Yes, you can link your trading account with a Demat account. This will also help avoid providing your Demat account details for every transaction. Once the order is processed, the shares will be either deposited or debited from the linked Demat account.
What are the key benefits of participating in a depository?
The benefits of participating in a depository are: Immediate transfer of securities; no stamp duty on transfer of securities; elimination of risks associated with physical certificates such as bad delivery, fake securities; reduction in paperwork involved in transfer of securities; reduction in transaction cost; and nomination facility.
Can someone else operate my demat account on my behalf?
Yes. If you authorise any person to operate your account by executing a power of attorney and submit it to your DP, that person can operate the account on your behalf.
Can I change details of my bank a/c?
Yes. Monetary benefits on your security balances are paid directly to the bank account as per the details provided by you while opening the demat account. So you have to ensure that you inform your DP of any subsequent changes in your bank account details.
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