A dematerialised or demat account is very similar to a bank account. Just that, in a demat account, you hold securities such as shares, debentures, bonds, Mutual Funds, etc., instead of money. It acts as an alternative to holding securities in the form of physical certificates. While online trading, you can use your demat account to hold the securities that you buy.
Additional Reading: Term Of The Week: Non-Convertible Debenture aka NCD
A company enlisted in a stock exchange is under the obligation to offer the securities in both physical and dematerialised mode. Physical securities mean actual certificates giving information about the shares of a company owned by a person. Dematerialisation is the process of converting physical shares (i.e. the share certificates) into an electronic form. Shares once converted into dematerialised form are held in a demat account.
Remember that if you want to trade, i.e. buy and sell securities, in the Indian stock market, you’ll need to open a demat account. Let’s learn more about a demat account – its features, benefits, how to open an account and more.
Additional Reading: Your First Steps To Investing In The Stock Market
Demat Account – Definition
As mentioned earlier, a demat account is just like a bank account where you hold your securities instead of money. Buying and selling of these securities happen through a demat account.
Why A Demat Account?
By using a demat account, you need not worry about mutilated share certificates, postal delays, and counterfeit shares. A demat account is a safe and convenient means of holding securities.
Additional Reading: Demat Account 101
Demat Account – Features & Benefits
As opposed to dealing in physical certificates and facing delays with your transactions, holding and trading securities via a demat account has the following advantages:
- You won’t have to worry about the safety of your shares, bonds, debentures, etc. They are secure in a demat account
- Transaction costs are lower than when dealing with their physical counterparts
- With a demat account, it is easy and simple to invest in securities online
- You can sell as many shares you want, even one is fine, whenever you want
- Physical certificates come with risks such as theft, fake certificates, forgery, bad delivery, transfer delays, etc. A demat account eliminates all these threats
- Electronic settlements are super easy and convenient with a demat account
- Transferring securities is faster, thanks to reduced paperwork
Opening A Demat Account
When it comes to demat accounts, there are two terms that you need to understand – depositories and depository participants (DPs). There are two depositories that are SEBI-registered – the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). These depositories hold your electronic securities and allow you to make transactions.
The depository participants are the middle-men (or agents) that work between you, as an investor, and the depository. You’ll need to open an account with the DP (which is actually the demat account) in order to avail the facilities offered by the depositories.
- Choose a depository participant (A depository participant can be a financial organisation like banks, brokers, financial institutions, custodians, etc., acting as an agent of the depository to make its services available to the investors)
- Fill up the account opening form provided and submit the necessary documents.
- The depository participant will conduct in-person verification
- Once verified, the DP will provide you the unique account number or ID. You can use this to access your online demat account
Do not forget to add a beneficiary when opening a demat account. Usually, it takes a week or two to open a demat account. However, the advantage about opening demat accounts is that you can open multiple accounts with different DPs and there is no minimum share balance required to open one.
Opening A Demat Account – The Charges
Once you choose a DP to open a demat account with, you’ll be sent the agreement terms, rules and regulations, and charges that are applicable to you. Most depository participants do not usually charge a fee for account opening. A few others either have a fixed charge or have refundable charges.
Apart from the account opening fee, a DP may levy other charges such as transaction fees, yearly maintenance fees, and conversion fees if you’ve to convert your physical certificates to the demat format.
Opening a Demat Account – Know Your Customer (KYC) Documents
Whether you’re opening a bank account or getting a new SIM card for your mobile phone, customer identification has become a norm for all services. It is no different when it comes to opening a demat account. A depository participant will require the following KYC documents:
- Identity proof – PAN, Passport, Voter ID or Aadhaar qualify as identity proof documents
- Address proof – Passport, bank statements, utility bills, ration card, driving license, etc. qualify as address proof
- Bank details
Once you have a valid demat account in place, you’ll need to open a trading account to buy and sell securities online. A lot of the top banks such as Axis, SBI, ICICI, and HDFC offer trading accounts. You can get in touch with the bank directly to avail this service.
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