A demat account, also known as a dematerialized account, is a type of online portfolio that stores the shares and other securities of a customer. It has eliminated the need to store and exchange actual share certificates. For NSE transactions, demat trading was first introduced in India in 1996. To conduct transactions in any stock exchange starting on March 31, 2019, all shares and debentures of listed companies must be dematerialized in accordance with SEBI regulations.
Shares and other securities are kept in dematerialized (electronic) format in a demat account. Bonds, ETFs, mutual funds, and other comparable stock market assets can all be included in a portfolio using these accounts.
Features of Demat Account
The features of opening a Demat account are-
- Easy Access
Through net banking, you have quick and simple access to all of your investments and statements.
- Easy Dematerialization of Securities
All of your physical certificates are converted to electronic form by the depository participant (DP), and vice versa.
- Receiving Stock Dividends & Benefits
It employs quick and simple techniques to collect dividends, interest, or refunds. Everything is automatically credited to the account. Additionally, stock splits, bonus issues, rights, public issues, etc. are updated in investors’ accounts using the electronic clearing service (ECS).
- Easy Share Transfers
The use of a demat account has made share transfers much simpler and faster.
- Liquidity of Shares
Gaining cash from the sale of shares is now easier, quicker, and more practical thanks to demat accounts.
- Loan Against Securities
One can obtain a loan against the securities held in their account after opening a demat account.
- Freezing Demat Account
One may choose to temporarily freeze some or all of the securities in their demat account. This will eventually prevent money from any debit or credit card from being transferred into your account.
How Does A Demat Account Work?
- Trading through a Demat account is similar to trading in person, but a Demat account is electronic instead of physical. You place your first order in your online trading account to begin trading. For this reason, a link must be made between the trading and demat accounts. the exchange processes an order after it is placed.
- The availability of shares, the market price of the shares, and the Demat account information are all checked prior to the order’s final processing. After the process is finished, the shares appear on your statement of holdings.
- An explicit delivery instruction letter describing the stock must be provided when a shareholder intends to sell shares. The cash value is then added to the trading account and the account is then debited for the shares.
- You can open one of three types of Demat accounts, and if you live in India, you will mainly be working with equity trading and investing. Therefore, these three accounts are available.
Documents Required for Opening a Demat Account
- PAN card
- Aadhar card
- Address Proof
- Passport size photos
- ID proof
Types of Demat Account
An investor can opt to open demat account of any of the following types-
- Regular Demat Account
Any Indian citizen who is a resident may open a regular Demat account.
- Repatriable Demat Account
Indian citizens who are not residents may open repatriable Demat accounts. Such accounts allow for the transfer of funds from abroad so long as they are connected to NRE bank accounts.
- Non-repatriable Demat Account
Also available to NRIs are non-repatriable accounts, but no foreign money can be transferred to these accounts. To own and manage this kind of Demat account, a person must link an NRO bank account.
To buy or sell securities on the stock market, Demat account holders must open a trading account. While individual Depositories and Depository Participants control Demat accounts, SEBI regulations apply to trading accounts.
Benefits of Demat Accounts
Investors who opt to open Demat account can enjoy several benefits. Here are some of the most common benefits.
- Physical shares cannot be damaged, forged, lost, or stolen thanks to demat accounts.
- The electronic system is also a great deal easier and can be finished in a matter of hours. The entire process has been streamlined and time-saving thanks to the elimination of several time-consuming operations.
- Demat accounts offer remote access advantages as long as users have registered their net banking accounts with the relevant financial institution.
- Bank accounts and dematerialized accounts can be combined by investors to enable electronic fund transfers.
- If customers open a Demat account online, they can take advantage of a nomination facility.
- Account owners who own a particular unit of securities in their portfolio can choose to have their accounts frozen for a set amount of time. This may help one prevent any unauthorized transactions into their Demat account.
Demat Account Number and DP ID
A DP ID, or Depository Participant ID, is also given to investors by their preferred broking company or other financial institutions. The first eight digits of one’s account number are represented by the DP ID, which is a component of the account number.
When an investor converts physical shares to demat, transfers shares from one demat account to another, or transfers funds from a demat account to a bank account, both the depository and depository participants use this information.
Demat Account Charges
Although opening a Demat account is free for investors, there are fees associated with that account to ensure it runs smoothly. Every brokerage firm, including banks, has a different set of brokerage fees. These are a few of them:
- Annual Maintenance Charges
For the Demat account’s annual maintenance, almost every firm charges a fee. Depositories compute the applicable fee for each investor in accordance with a set of rules.
Beginning on June 1st, 2019, SEBI will implement a new rate for Basic Services Demat Accounts, or BSDA. The revised guidelines state that there will be no annual maintenance fee for debt securities up to Rs. 1 lakh, but that holdings between Rs. 1 lakh and Rs. 2 lakh may be subject to a maximum fee of Rs. 100.
- Custodian Fees
A custodian fee is levied either annually or on a one-time basis by depository partners. The company pays the amount directly to the depository (NDSL or CDSL).
- Demat and Remat charges
To cover all costs associated with the physical printing or digitization of securities, these fees are assessed as a percentage of the total value of the shares bought or sold.
An investor is also responsible for paying fees like credit charges, applicable taxes and CESS, rejected instruction charges, etc. in addition to the ones mentioned above.
Given that it is one of the most popular ways to invest in the stock market, demat accounts are essential for stock market investments. Recently, however, a number of online platforms offer the benefit of online trading without the need for such accounts.
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