Demat Account 101

By BankBazaar | November 18, 2016

demat-account-101

Investments should be your priority, no matter what your financial goals are. You must’ve received this advice very often from people who are pros at financial management. The stock market is a great place to invest, as long as you are well aware of how it functions. If you play your cards right, you can make substantial profits. But one wrong move is all it takes to turn the tables.

A Demat account is an indispensable part of the stock market. Not sure how it works? Let’s start with the basics.

What is a Demat account?

Demat stands for ‘dematerialised’. Instead of an investor storing hard copies of certificates and other documents involved, shares and securities are held electronically in a Demat account. Anyone who wishes to invest in the stock market opens this account with an investment banker or a sub-broker. This Demat account number is then used for all transactions made in the stock market.

Additional Reading: Investing In Demat Gold

How does it help?

With Demat accounts in place, investors don’t need to worry about the paperwork involved in transacting shares. It may not sound like a big deal, but it helps avoid a lot of confusion and trouble related to paper shares. Since there’s no paperwork involved, the risk of losing important papers reduces significantly. This system was introduced in India under the Depository Act of 1996, which made the process of dealing in shares quite convenient.

Additional Reading: Understanding How A Demat Account Functions

Advantages of a Demat account

Apart from eliminating paperwork (and saving a lot of paper, of course), here are the other benefits of a Demat account:

  • There’s no stamp duty involved on the transfer of securities
  • One Demat account is all you need, to hold both equity and debt investments
  • With a Demat account in place, the overall transaction cost decreases
  • Traders get to work from anywhere as there’s no complicated paperwork involved
  • Demat account facilitates an immediate transfer of securities (what’s better than saving time and making money too?)
  • No paperwork also means better security since the chances of losing important paper shares and other relevant documents reduces as well
  • You get to avail the facility of auto credit of Public Issue refunds to the bank account
  • You get to keep a record of all the transactions as they’re sent to you via email (helps manage things better, doesn’t it?)
  • The liquidity increases as you get to sell the securities at any time of the day (during trading hours)
  • You also get to avail of the facility of auto credit of Rights / Bonus / Public Issues / Dividend through ECS
  • For things like change of address, registration of power of attorney etc., all you need to do is give an instruction to the Depository Participant (DP)

Requirements to open a Demat account

Are you planning to invest in the stock market? Not sure about the process and requirements of opening a Demat account? Worry not! Here’s all you need:

  • PAN card details: To eliminate the existence of fake trading accounts, it has been made mandatory for people to furnish their PAN card details while opening a Demat account.
  • Personal verification: A PAN card is not enough. You also need to meet your Demat account provider and verify all your personal details in person. Only NRIs and other foreign nationals have the flexibility of escaping this session. They can send in all the relevant documents, like a duly filled account opening form, address, and identity proof, via post. All these documents, however, need to be duly attested either by the consulate general of the country he or she resides in or by the Indian embassy.

What are the main fees involved?

As we’ve seen so far, Demat accounts simplify our lives in a number of ways. However, this comes at a price. Here are some of the main fees and expenses involved with Demat accounts:

  • Account opening fee

Whether or not you’re supposed to pay this fee depends on your DP (depository participant). For instance, if you’ve opened a Demat account with any of the leading private banks like HDFC, Axis Bank, or ICICI, you don’t have to pay anything. However, some of the others like Globe Capital, Karvy Consultants, Kotak Securities, etc. do charge an account opening fee. The Stock Holding Corporation also lets you hold your Demat account for longer by offering a lifetime account opening fee. Not just that, the account opening fee is totally refundable as well.

  • Transaction fee

You’re charged for conducting credit/debit activities on your Demat account every month. That’s the transaction fee. This fee can differ depending on the type of transaction (selling or buying). While some DPs charge only for debiting the securities, some might charge for crediting as well. Apart from the transaction fee, you’re also supposed to pay service tax to the DP. Also, the DP can also charge you for the conversion of shares from electronic to physical form and vice versa.

  • Maintenance fee

You have to pay this account management fee either monthly or annually. Most of the time it is levied in advance.

How to open a Demat account?

Now that you know all about the basics of a Demat account, you must be thorough with the procedure involved in opening one as well. Here’s how to proceed:

  • First things first. You need to explore the market and choose the best DP (Depository Participant). Like we’ve explained before, a DP can be a financial institution like a bank, broker, custodian, etc. that makes the Demat account services available to you.
  • Done choosing your DP? Great! Next, you need to ask them for a Demat account opening form. After submitting all the relevant documents, like your PAN details, etc. (depending on what your DP asks for), you need to sign an agreement.
  • Signed the agreement? We hope you read the fine print well instead of blindly signing it. Wait! Before leaving their office, don’t forget to carry your copy of the agreement.
  • Congrats! That’s about it. Now the DP will open your account. The unique account number that you receive now will be used in future for all transactions. It’s called a Beneficiary Owner identification Number (BOID).

Phew! We know that may have seemed like an information overload but look on the bright side. Now you know everything about Demat accounts and nothing can possibly stop you from investing your hard-earned money in stocks. Before you start juggling stocks and shares, we recommend you do your homework right. You may not get many chances to change a bad decision later. Better be careful from the start, right?

Oh, one more thing! A Demat account works like a bank account. If you leave it inactive for a long period, it may be dismissed. If you plan on investing in the stock market again, you’ll have to pay a reactivation fee. You won’t want to do that, would you?

Want more tips on money management? Try us!

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Category: Investments

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