What is a Demat Account? Detailed Guide

A Demat account is an account that holds your securities in a Dematerialized form. If you want to trade in securities then this is the ideal way to start investing.

Why did Demat accounts came to existence?

Long before the creation of the National Stock Exchange, securities in India were listed only on the Bombay Stock Exchange. The BSE adopted the electronic trading system in 1995.

But, how were securities traded before 1995 in India?

Well, I guess most of us have seen the movie “The Harshad Mehta Scam 1992”. If not, do watch it. It tells you a lot about market manipulation and price rigging.

The Harshad Mehta movie is a perfect example of how securities were traded before Demat accounts came into existence.

Earlier stocks were trades at Dalal street through the open-outcry system where brokers used to shout in the open market. Hand signals were used for conveying information about the buying and selling of securities at the area called the Pit.

Now, I have seen the movie twice, but I could not interpret any of the hand gestures used during the movie.

This was one of the many drawbacks that led to the fall of the open outcry system.

Demat accounts came into existence through the Depositary Act 1996.

What is Dematerialisation?

Dematerialization is the process of converting the physical securities certificates into an electronic form. A dematerialized share is very easy to store for an investor and facilitates the easy buying and selling of securities. Dematerialization has lowered the risk of theft damage of share certificates.

Who are the depositary and depositary participants?

A depositary is someone who holds your securities in a dematerialized form. 

In India there are two Major depositories registered with SEBI that are licensed to operate in India:

  • NSDL – National Securities Depositary Limited
  • CDSL – Central Securities Depositary Limited

These depositaries do not have direct contact with investors like us. They need a middleman to facilitate trading. 

Here, comes the role of the Depository Participant. A DP acts as an intermediary between the investor and the depository body.

Generally, Depositary Participants are stockbrokers or financial firms that are registered under the depositary act 1996 and follow the SEBI guidelines.

Here is a list of the best demat trading account in India are:

  • Zerodha 
  • Upstox
  • 5 Paisa
  • Angel Broking
  • HDFC Securities 
  • Kotak Securities

Types of Demat Account

Types of Demat Account

Regular Demat Account

A regular Demat account is used by traders living in India. The trading is facilitated by NSDL and CDSL depositaries with the help of Depository Participants. A regular Demat account holder can also transfer his holding to another Demat account without any extra charges.

Repatriable Demat Account

A repatriable Demat account is used by investors which are non-residents of India. A repatriable Demat account allows the transfer of funds in foreign currency through an NRO bank account. The investor can invest in the Indian share market through this account from any part of the world.

A Non- resident of India has to follow the rules of the Foreign Exchange manager Act (FEMA) if he/she wishes to invest in the Indian share market.

Non- repatriable Demat Account

This Demat is also recommended for Non- residents of India. The only fun fact about this account is that you cannot transfer funds across different nations. It is mandatory to link the Non – repatriable Demat account with an NRO Bank Account.

Basic Service Demat Account

The BSDA is newly launched by SEBI that has all the features of a regular Demat Account. One thing that makes this account special is you don’t have to pay any maintenance charges if your holdings are below 50,000 rupees. A nominal charge of Rs 100 is levied if the holdings are between Rs 50,000 and Rs 2,00,000. 

Why you should go for a Demat account?

Benefits of demat account

1. Loan Facility

Yes, you heard it right. You can take loans on the securities held in your Demat account. You can pledge the shares that you own with your respective bank. Of course, there are certain terms and conditions that depend on your bank, but usually, these conditions are consumer-friendly. The securities act as collateral that helps in securing a loan from the bank.

2. Dematerialisation & Rematerialsation of Shares

You can easily convert your physical securities into dematerialized shares through your Demat account with the help of a depository participant.

Now, a lot of us prefer the dematerialized securities. But, if you want, you can convert your dematerialized securities into rematerialized physical securities as per your requirements.

The Demat account offers both the facility of dematerialization and rematerialization of securities.

3. Avail corporate action benefits

Having a Demat account gives you the added advantage to avail the benefits of corporate actions such as stock split, bonus issue, and dividends.

The amount of dividend gets automatically credited into your bank account through your Demat account in a hassle-free manner.

Shares in your Demat account get automatically updated in case a company announces a bonus issue of a security that you currently hold.

4. Low Cost

Physical securities need a lot of paperwork and stamp duty while buying and selling shares. This in turn increases the cost. Now, the Demat account offers you the platform to buy and sell securities within seconds and does not need any paperwork

5. Secure your investments

Earlier share certificates were kept in cupboards which resulted in damage of the share certificate and sometimes theft. Demat account converts your securities in electronic form, thereby eliminating the risk of damage and theft.

6. Trade-in any number of quantity

Earlier share certificates were issued in a specified lot. But, with the help of the Demat account, you can buy and sell securities according to your needs and requirement.

How to Open a Demat account ?

Demat account opening

Step 1 : Depositary Participant 

You have to choose a depository participant to open a Demat account. Now there are many depositary participants or stockbrokers like Zerodha, Upstox that offer Demat account services. However, you should choose a depository participant as per your needs and requirements.

Step 2 : Fill the Account opening form 

Once you have selected your depositary participant you have to submit a Demat account opening form with your selected broker.

The Account opening form has basic fields like name, address, PAN number, bank details, and filling in won’t be a time-consuming process. Some brokers offer a single form for Demat and trading accounts.

Step 3 : Necessary Documents for Opening the DEMAT account

You will need the below documents for verification purposes.

  • Pan Card – Mandatory 
  • Address proof (Any-one)- Voter’s ID, Driving License, Aadhar card
  • Passport size photographs –  Two
  • A canceled cheque from your savings bank account

Many brokers offer the facility of online verification and you just need to submit the scanned copies of these documents.

Step 4 : E-signing Of agreement

Once you are through with the document verification. You will receive an agreement from your respective brokers. The agreement basically contains the information about the depositary participant and all the rights and duties that the depositary participant will fulfill. Read the agreement carefully before signing. 

Step 5: BO ID number

Bingo your Demat account is created. You will receive a BO ID number once the Demat account process is complete. The BO ID is a unique 16 digits code. The first 8 digits represent the Depositary participant ID while the last 8 digits represent the client ID.

A BO ID is generated only when you open your Demat account with a certified depository participant.

What are the charges for a Demat account?

Now the fee and charges for the Demat account depend on the broker to broker. You should choose your broker carefully before opening a Demat account.

Let us take the example of Upstox to give you a fair idea about the fees

  • Demat account opening fees – Rs 249
  • Annual maintenance charges – Rs 300
  • Dematerialisation of share certificate  – Rs 2 per certificate
  • Rematerialisation of share certificate  – Rs 2 per certificate 
  • Postal charges – Rs 35

How to use a Demat account?

Demat account is pretty simple to use. Firstly I will have to link my Demat account to my trading account. My trading and Demat account will be linked to my bank account.

To start trading in stocks I will have to transfer funds from my bank account to my trading account.

Once the funds are added, I will place a buy order for my desired share. Once the buy order is executed, my shares will be reflected in my Demat account. The delivery of shares will take T+2 days and the same thing applies if I sell some shares.

T+2 days = The day the transaction took play + 2 additional days

Frequently Asked Questions about Demat account

Q1. Can I open more than one Demat accounts?

Ans: Yes, you can have multiple Demat accounts but not with the same brokers. If u want multiple Demat accounts then you have to open accounts with different brokers.

Q2. Is Demat Account Safe?

Ans: Yes, a Demat account is perfectly safe. NSDL and CDSL are the depositaries that regulate the Demat accounts. Alert messages and E-mails are sent for every transaction performed in the Demat account. An investor should closely watch such alert SMS in case of any discrepancies,

Q3. Is the Demat account free?

Ans: The charges of a Demat account depend on the broker to broker. However, currently, brokers like Motilal Oswal and angel broking are offering free Demat accounts.

Q4. Is Demat account mandatory?

Ans: Just like a bank account, a Demat account is required for storing your securities. A Demat account is mandatory if you want to hold shares on a delivery basis.

Q5: Can I apply for an IPO without a Demat account?

Ans: Although one can apply for an IPO without a Demat account. But, a Demat account is required once the shares are allotted to the investor. So an investor should be ready with a Demat account if he/she wishes to hold the share allotted in the IPO

Final Thoughts

A Demat account holds your securities in an electronic form. It is mandatory if you want to trade in the delivery segment.

It offers safe trading at a low cost, unlike the traditional open outcry system that was hard to interpret and had many flaws.

One must open a Demat account with a depository participant that is facilitated by NDSL or CDSL. The charges of a Demat account vary from broker to broker. One should choose a depository participant according to his needs and requirements.

Related Posts

Leave a Comment