What is Demat Account

Demat account is a term for Dematerialized account. Much like a bank account, a demat account is used to hold shares and financial securities such as bonds, government securities, Mutual Funds and ETFs in an electronic format. A demat account makes the process of holding and trading such investments much easier.

What is Demat Account

Demat Account is an account to hold financial securities in a digital format. A Demat account not only holds all investments an individual makes, but also allows for electronic transactions when shares, mutual funds, ETFs or other financial assets are bought or sold. It is a form of online portfolio that holds and keeps an electronic record of your ownership of tradeable assets.  In India, demat accounts are maintained by two depository organizations: the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CSDL) which provide free demat account services. These depositories appoint intermediaries called Depository Participants (DP) or Stockbrokers, who facilitate their services. 

Types of Demat Account

There are three types of Demat Accounts.

• Regular Demat Account: This is the most common type of demat account and all residing Indian citizens who want to trade in shares are eligible to open a regular demat account. The stocks get credited when you purchase and debited when you sell from your demat account.

• Repatriable Demat Account: A repatriable demat account is a facility for NRIs to invest in Indian financial markets. One can transfer money from overseas through such accounts provided it is linked to an NRE account. It allows NRIs to transfer funds overseas. Individuals desirous of opening repatriable demat accounts must comply with the regulations of the Foreign Exchange Management Act (FEMA).

• Non-Repatriable Demat Account: Non-repatriable accounts are also for NRIs, however, these accounts cannot be used to transfer funds from abroad. An individual must link a NRO bank account to own and operate this type of demat account.

How does Demat Account Work.

Demat accounts work similarly to how a bank account functions. Demat accounts hold shares and other securities in electronic form and must be linked with an online trading account. When you want to buy shares, you begin by placing an order through the linked trading account and your depository participant forwards the ‘buy’ order to the stock exchange. The exchange processes the order and Demat account details the market price of shares and the availability before the order is processed. On completion, the proceeds are credited to your Demat account.  When you wish to sell shares, a delivery instruction note must be provided with details of the stock. Shares are then debited from your demat account and equivalent cash value is credited to the trading account.

Features of Demat Account

Easy Share Transfers

Transfer of shares is much easier and timesaving. Transfer of holdings is through an electronic delivery instruction slip (e-DIS) or receipt instruction slip (e-RIS) for buying or selling which includes all information necessary for a transaction to go through smoothly.

Easy and Secure Holding

With a Demat account, investors can hold their securities in electronic form, eliminating the need for physical share certificates.

Liquidity of Shares

Demat Accounts have made it simpler, faster and more convenient to get money by selling shares.

Lower Risk

Digitization eliminates the room for human error, which poses a risk when physically trading in shares or making investments.  

Easy Access

The major benefit of having a demat account is that it gives quick and easy access to all their investment and statements with the help of net banking.

Multiple Securities

Beyond just shares, it can hold many securities, from mutual funds to government bonds, all in one place.

Pledging Facility to Avail Loan

Loans can be obtained against securities that are held in the demat account. These holdings are used as collateral to avail loans by account holders.

Documents Required for Demat Account

• PAN card
• Aadhar card
• Address Proof
• Passport size photos
• ID proof
• Proof of Income
• Proof of Bank Account

Benefits of Demat Account

• Digital and secured storing of shares and financial securities
• Seamless and fast transfer of shares
• Eliminates risk of damage, forgery, misplacement, or theft of physical shares.
• Benefits of a nomination / beneficiary facility.
• Easy tracking of trading activities
• All-time and remote access benefits.
• Automatic credit of bonus stocks, rights issues, split shares

Demat Account Charges

A Demat Account provides you the convenience of managing your shares and transactions in a seamless manner from any location. Although any investor can open a free Demat account, there are certain nominal charges that are levied on that account to ensure its smooth operation.

Demat Account Opening Charges

To open a Demat Account online, an association with a registered Depository Participant (DP) is necessary. A DP is a brokerage firm or a bank that holds securities. They offer of opening a Demat Account either for free or for a small charge.

Annual Maintenance Charges

An annual maintenance charge is levied by most DPs for your Demat account. The amount depends on the value of holdings and the value of the transactions you make in a year. Depositories follow specific guidelines to calculate the fee applicable for each investor.

Demat Transaction Charges:

Your Depository Participant will also charge a nominal fee for transactions. This charge is associated with every transaction of buy or sell that you make with your Demat Account.  Buying or selling can incur different transaction charges. Some DPs charge a transaction fee only when you sell securities.

Custodian Fees

Depository participants charge a custodian fee as a one-time or on an annual basis. The sum is paid directly to the depository (NDSL or CDSL) by the company.

Other than the above-mentioned fees, an investor is also liable to pay fees like credit charges, applicable taxes and CESS, rejected instruction charges, etc.

Conclusion.

A demat account is a convenient digital solution for holding and managing investments an individual makes in shares, government securities, exchange-traded funds, bonds and mutual funds in one place It offers a secure platform for trading and enables faster and more efficient transactions. Investors also enjoy the benefits of reduced transaction costs encouraging larger trade volumes, thereby increasing the potential for gainful returns.