What is a Demat Account?
This is an account which is used to hold financial securities in electronic form and a fact to be noted is that the popularity of demat accounts has soared in the past few years.
Demat account stands for dematerialised account and around 4 million accounts were opened in the year 2018 alone. Dematerialization is a process which involves converting physical certificates into electronic balances.
Depositories like NSDL (National Securities Depository Limited) and CSDL (Central Securities Depository Limited) provide demat services through intermediaries. The charges that are levied vary based on the type, the volume of the account as well as the terms and conditions that have been set.
The various securities which can be held by a demat account are stocks, shares, electronic gold or E-gold, bonds, IPOs, mutual funds, government securities, non-convertible debentures and exchange traded funds.
Your balance and history can be viewed and your financial transactions can be managed.
Different Types of Demat Accounts
There are three types of demat accounts that are available to help traders understand the working of the market and choose the most suitable demat account according to their preferences.
Regular Demat Account –
A regular Demat account is necessary for residents living in India and it is the idealistic choice for individuals that invest in only equity shares. The shares that are bought are stored in digital format and when they are sold they are taken away.
A new type of demat account was introduced by SEBI and it is called the Basic Services demat account. There are many similarities that this account has with a regular demat account but if the holding is within INR 50000 there aren’t any maintenance charges.
Repatriable Demat Account –
This is a demat account which is meant for individuals that do not live in india. They are known as NRIs or Non-resident Indians. This type of demat account needs a Non-Resident External (NRE) bank account and all of the proceeds can be credited to this bank account which can be accessed from abroad.
Non-Repatriable Demat Account –
This is an NRI Demat account which has been linked to an NRO bank account and this account has restrictions and impositions on transferring money to other countries. Here, funds cannot be transferred abroad and it is for individuals who do not reside in India.
Top 7 recommended Best Demat accounts.
What are the Advantages of Demat Accounts?
- There is quick, immediate transfer of the securities.
- ‘Bad deliveries’ can easily be eliminated and taken out.
- There are advantages that can be received when it comes to corporate benefits such as dividends and bonuses.
- Transactions can be made as per the investor’s convenience.
- There is no stamp duty that is provided on the transfer of securities.
- It provides a sense of safety and security as there is a very low chance of theft when the assets are in demat form.
- Shares can be purchased and sold in bulk or at any quantity as long as the investor has a demat account.
- The settlement cycle for demat accounts has gone down from 14 days to 2 days and this saves precious time and energy of many investors.
- Errors that used to occur while trading have been significantly reduced.
- Securities that are in physical form can be converted into dematerialised shares.
What are some Disadvantages of a Demat Account?
- The costs incurred while opening the demat account end up being very high sometimes depending on the broker that is used.
- Instead of keeping their focus on long term goals, investors have started to constantly buy and sell trades in a short term manner which affects the creation of wealth over a period.
- You need to understand how technology works in order to be able to operate and use a demat account to go through deals. This may seem complex and hard to understand for many users.
How can you open a Demat Account?
The procedure related to opening a Demat account is quite simple. Demat accounts can be opened either online or offline.
To open your demat account offline,
Choose a Depository Participant
Compare the services that are offered by different depository participants and select the best one that matches your requirements and needs.
Fill the application form
In order to open a new demat account, an application form has to be filled and KYC documents which include personal information, Identity proof, Address proof, bank details and PAN card need to be provided.
Process of Verification
To ensure that ethical trading is taking place, a list of rules and regulations will be provided to you. This will help clear any misconceptions or doubts that may come to mind. An in-person verification is done by the depository participant and fees that are related to opening the demat account need to be paid in full. The fee is dependent on the pre-existing policies of the DP. Every DP has different fee rates.
Final Formalities are taken care of.
If the documents get verified and the specific formalities are considered, an identification number will be given for your account and the demat account can be accessed.
Once your documents are verified, and the final formalities are completed, your new demat account will be opened. You will also be given the Unique Identification Number for your account.
To open your demat account online in a convenient, time saving manner,
- Head to the website of the depository participant of your choice.
- Provide your details in the form given where your name, number and address will be questioned. You will get an OTP on the phone number that you have provided while registering.
- Enter the OTP in order to access the next form where your KYC details will be asked for. This includes PAN card details, bank account details, and contact details.
- You can finally open your demat account now and the account number or other details can easily be viewed on your email account or phone number.
Multiple demat accounts can be opened as long as the required KYC details are given with or without having the same DPs.
How do you use a Demat Account?
- The first step is to make sure that your trading account is linked to your demat account. They both have to also be linked to your bank account in order to have access to funds. Remember, a demat account is simply a depository account where your investments are stored.
- You need to know that charges differ between various brokers and depending on the style or frequency of trading, a choice has to be made between discount brokers or full-service brokers.
- Ensure that the appropriate data is provided while opening the account as an error can result in your application being rejected.
- An important part is to initially name a nominee as it will help in preventing many problematic situations in the future.
- Updates are normally sent by most DPs and they are safe but the investors still need to stay vigilant and check their accounts to prevent any sort of fraudulent activity from taking place.
What are the various charges that are associated with a demat account?
This normally depends on the policy of the depository participant (DP).
Every broker has a different fee that is to be paid for the demat account.
A one time time fee for opening the account is usually present, annual maintenance fees, transaction fees on every order placed by the DP and dematerialization fees are the main charges.
An example could be taken using Zerodha where,
- The amount taken for opening the account is INR 200.
- To enable the commodity account, INR 100 is to be paid.
- The annual maintenance charges are INR 300. This fee is charged quarterly at INR 75.
An overall conclusion can be reached to state that investors can efficiently manage their financial securities on an electronic platform with the help of a demat account which is mandatory for anybody who wants to start trading.
A commerce graduate who is on a mission to educate people about investment and personal finance.