What is a Demat Account and how does it work

What is a Demat Account and how does it work

A demat account is your gateway to trading in the securities market. But, what exactly is this concept of a demat account and what are the demat account benefits and the demat account types available to you? Demat account is an account where you hold shares and other securities in an electronic mode. The way you hold your money in a bank account, without having to deal with physical cash, similarly you can deal with shares electronically through your demat account. Demat account is, therefore, a digital platform for holding your shares. But it is more than that. Is your demat account safe and secure? It can be used to store gold bonds, stocks, bonds, mutual funds, exchange-traded funds, and so forth.

Remember, when you open a demat account, these are opened with NSDL or CDSL, both of which are public financial institutions. Of course, you don’t open your account with NSDL or CDSL directly, but with a depository participant. However, your shares are still with either NSDL or CDSL. In fact, demat shares or electronic shares are safer than physical shares as they obviate risks like loss of share certificates, signature mismatch, bad deliveries etc.

How do you dematerialize shares?

To dematerialize shares, the first step is to open a demat account. As stated, you can open the demat account with any depository participant, which can be a broker or a bank. Normally it is advisable to keep your trading account and demat account with the same broker for ease of transactions. Once your demat account is opened, here are two typical demat account requirements.
• Firstly, you can convert your physical shares into demat mode, which is called dematerialization. Here is how you do it. You can hand over the physical share certificates with a signed demat request form (DRF) to your depository participant (DP). The DP verifies the shares and then dematerializes them after cancelling the physical shares. Equivalent shares are credited to your demat account. Today, it is only possible to buy and sell in demat form. The demat process takes 10-15 days.

• The second thing you can do with your demat account is that you can actually buy and sell shares in demat mode. Today, your trading account is linked to your demat account so in order to buy shares you must make the payment on T+1 day and the shares will get credited on T+2 day to the demat account. Similarly, when you sell demat shares, the shares are debited to you demat account on T+1 day and the funds are credited to your bank account on T+2 day.

Open Demat Account

Table of Content

  1. How do you dematerialize shares?
  2. Five things you must know about the demat account benefits
  3. Process of demat account opening

Five things you must know about the demat account benefits

Here are five things to know about your demat account benefits.
1. Today you can hold physical share certificates, but if you want to sell these shares, then a demat account is mandatory. It is not possible to buy or sell shares of any company without a demat account. Today in India, 99% of all shares are dematerialized and 100% of the settlements on the stock exchange happen only in demat form.

2. If you want to apply for an IPO, then you need a demat account. IPO shares are not issued in physical form, but they are only credited directly to your demat account. Hence, if you are interested in participating in the IPO market, demat account is must.

3. Trading in futures and options does not require a demat account. That is because futures and options are contracts and not assets and the demat account only holds assets in custody. However, you need a demat account to offer shares as margin for your F&O trading activity.

4. Similarly, even intraday trading does not in any way impact your demat account since the net position at the end of the day is zero. However, as per SEBI regulations, demat account is mandatory for trading in equities, so you will still need to have a demat account even if you just want to trade on an intraday basis.

5. An individual can have any number of demat accounts, although each demat account has a cost based on the demat account features and the demat account type. However, a person can only have one demat account with a single DP. Of course, an individual can have an individual account and joint account with the same DP as long as the primary holder is different.

Process of demat account opening

How do you go about opening your demat account? Here are some simple steps involved in the demat account opening process.
• Identify your depository participant (DP) to open a demat account. Normally, you can evaluate the DP based on proximity to your residence, services offered, market feedback etc. Generally, brokers open trading-cum-demat (TCD) account and it is always preferrable to keep you trading and demat account in the same place for ease.

• Complete the documentation process for demat account opening. You need to furnish proof of address and proof of identity, apart from your PAN card and cancelled cheque copy. These are basic demat account requirements. All documents must be submitted as photocopies while carrying the originals for verification purpose.

• Once the documents are submitted, the next step is to sign and execute the DP agreement. This is the contract that lays down the terms and conditions, so read the fine print. This agreement lays down the various charges entailed in detail. You can also check the demat account types available and the demat account features before you zero in on the DP.

• Once the documents are verified and the contract has been signed by you, the next step is the actual DP account opening. Normally, the process of verification, allotment of client code and compliance approval takes about 3-4 days. Then, the DP allots the Beneficial Ownership (BO) code which will be your demat account number. Your complete Client Code comprises of the DP id and your BO code together.  

• One way to simplify your demat account process is to execute a power of attorney so the broker/DP will automatically debit shares when you sell. You don’t need to give a debit instruction slip (DIS) each time. Today, NSDL and CDSL also give you the option to approval demat debits online, without giving power of attorney.

You can compress the entire demat account process by opening demat account online by authenticating it through your Aadhar Card. The entire process is online and the authorization is done through the typical Aadhar OTP route. No other documents are needed and you only need to submit PAN card copy and cancelled cheque copy online. There is a second level of in-person-verification (IVP) to be done, which can either be done with a camera fitted PC or at the nearest customer point of the DP. Your demat account is ready to go.