Are you thinking about starting an investment in shares or mutual funds? Has anyone asked you to open a Demat Account for investment in shares? Are you aware of the Demat account’s uses?
If these questions are going around in your head and you have landed here, we have a great piece of information for you. The article below will not only tell you about what a Demat Account is but also let you know its uses, benefits, features, and many other details that you need to know.
So, what is Demat account? It is an account similar to your bank account where the shares you purchase are stored like you store your hard-earned money in the bank. In the past, when shares were traded in physical format, the traders used to get paper share certificates. Those certificates being made of papers were risky to handle. They used to get destroyed by fire or other natural calamities, prone to get stolen or destroyed by others. Thus, it was decided to introduce electronic share certificates to the investors and for storing these electronic share certificates, Demat Account was introduced. The concept of the electronic share certificate is known as Dematerialisation, about which we will read in the next segment.
Concept of Dematerialisation
As you know, nowadays,shares are traded online and thus the investors get the share certificates in digital or electronic format. This process of conversion of the share certificates from physical format to the digital format is known as Dematerialisation. With the help of the dematerialization of shares certificates, one can track their holdings any time from any place using the digital platforms offered by the brokers. Moreover, it has become much more convenient and easy to maintain the holdings. Dematerialization of the shares is done with the help of a Depository participant (DP) in India. By DP, it means the brokers or the investment companies which help you open the Demat Account and trading account to trade and invest in shares.
These DPs further fall under two major Depositories in the country which are – Central Depository Services Limited (CDSL) and NSDL – National Securities Depositories Limited.
Types of Demat Account
While opening a Demat Account, you can choose from these three types according to your purpose of investment and requirement.
- Regular Demat Account: Regular Demat Account is for thecitizens of the country – India. The investors here and also the traders can use this type of Demat account. Similarly, there is another Demat Account where you can hold shares and investments worth Rs. 2 lacs introduced by SEBI as Basic Services Demat Account or BSDA. Since the holding capacity is low, the maintenance charges of the Demat Account or the AMC (annual maintenance charges) are also lower.
- Repatriable Demat Account: This Demat Account is for the NRIs with which an NRE bank needs to be joined/linked for fund transfers outside India.
- Non-Repatriable Demat Account: If you are an NRI and want a Demat Account but do not need to transfer funds abroad, then you can opt for this type of Demat account. Here, you need to link the Demat Account with an NRO bank account.
How does it work?
If you understand how a bank works, you can easily understand how this Demat Account works for your investment. When you buy the shares or other investment vehicles – bonds, mutual funds, etc. your Demat Account is credited by the Depository participant with those investment vehicles/certificates. The same is reflected in the statement you get on the Demat account. You can also check your holdings using the trading account you have linked with the Demat account.
When you sell the investments, then the DP debits the number of shares/ other instruments from your Demat Account holding. The amount equivalent to the sale of investment gets credited to your bank account after the transaction is settled.
Isn’t that work like your bank account?
What are the facilities you get with a Demat Account?
There are multiple uses of Demat account, and some of the primary ones are –
- You can easily transfer your shares and other investments without being physically present for the trade to happen at the exchange or broker’s office.
- You get multiple access points or platforms for trading. You can use your mobile/desktop or laptop to carry on your trading and investments.
- With the help of the Demat account, you can very smoothly or easily convert your shares or dematerialize them and vice versa.
- When the companies whose shares you hold announce and give away corporate benefits, you easily get them in your Demat or bank account. If the company provides dividend, you get them directly in your bank account as your Demat and bank account are linked together.
- It is easy to freeze or pause your Demat Account when you are not using the same. it is to safeguard the holdings in the account.
Benefits of Having Demat Account
- Time-Saving: You save a lot of time using the Demat Account for investments because you do not need much paperwork or with online trading, there is no paperwork at all.
- Highly Secure: The trading process using the Demat Account is not only secure because your share certificates are stored in digital format but also because your fund transfers are electronically done and this reduces the chances of theft or any kind of fraud.
- Reduces Cost: With the elimination of the paperwork involved in physical share trading, the cost is also reduced. Moreover, you can trade on your own which also lessens your expenses of trading.
- Prompt Deliveries: With the Demat account, you get your shares in your account promptly without any delay. It also helps in credit transfer within a very short period.
What is the link between Demat and Trading Account?
If you are wondering what is Demat and trading account link, then you must know that a Demat Account and a Trading account are like two sides of the same coin. These two need to be linked to trading and investments. When you buy or sell shares, the shares get credited or debited from the Demat account. Now, this happens when you instruct your DP to do so. For the same, you need to use your trading account where you will trade the shares and the same will be reflected in your Demat account.
The bank account is also an integral part of the transaction. The amount of shares purchased is deducted from the Bank account and vice versa.
How to open a Demat Account in India?
It is really easy to open Demat Account in India. You just need to follow these simple steps written below for Demat Account opening –
- Choose a Depository participant – brokerage house. Go to their account opening page and fill the application form with your details. The details you need to fill are linked to your details, PAN card number, AADHAAR card details, and Bank account details.
- You need to upload your documents on the website. Scan the documents and upload them on the website.
- You will receive a verification call from the broker’s office. They will verify your details. Some of the brokers these days verify the documents online only using the AADHAAR Card details.
- Once the verification is over, you get your Demat Account details in your registered email id.
- The details which are sent to you are Demat Account number, DP ID, and POA number which is Power of Attorney number. The POA is only given when the investor allows the stockbroker to handle his or her account on their behalf.
- These details come along with the user id and password which are the login credentials to your account.
Documents Required for Opening a Demat Account
The documents you would require to open Demat Account are –
- PAN card
- AADHAAR Card
- ADDRESS Proof
- Photo of the applicant
- Bank Details with Cancelled cheque
Demat Account and dematerialization of the shares have come as a boon for the traders and investors. It allows them to trade without any middlemen involved, without extra expenses, and it saves a lot of time and effort.
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