A Demat account is an electronic account that holds shares and securities in a digital format, eliminating the need for physical certificates. It simplifies the process of buying, selling, and transferring securities. Additionally, it enhances security and reduces paperwork in financial transactions.The concept of a demat account was introduced in 1996 by the National Securities Depository Limited, facilitating the conversion of physical shares into electronic form, resulting in eliminating risks of storing, theft, damage, and malpractices. This innovation significantly streamlined trading and enhanced the overall efficiency of the Indian stock market.
Types of Demat Account
Following are the different types of Demat accounts that helps investors to meet their online trading requirements.
Regular Demat Account
A regular Demat account is used by individual investors to hold and manage their shares and securities in an electronic format. It facilitates easy buying, selling, and transfer of stocks without the need for physical certificates. This account typically incurs annual maintenance charges and is suitable for a wide range of investment activities.
Basic Services Demat Account
SEBI has introduced a new type of demat account. If the value of the holdings in these accounts is under ₹50,000, no maintenance fees are being charged. For accounts with holdings between ₹50,000 and ₹2 lakh, the fee is ₹100. This new account is designed for novice investors who have not opened a demat account ever before.
Repatriable Demat Account
Non-resident Indian investors seeking to transfer profits from the Indian market to overseas accounts can open a repatriable account. To establish a repatriable account, investors must first set up an external non-resident account to receive payments and then close their ordinary demat account in India.
Non-Repatriable Account
This account is also for non-resident Indians, but it does not allow fund transfers to overseas markets. SEBI has made it mandatory for investors to have a demat account. If you do not have a demat account, you will not be able to trade on the Indian stock exchange.
Benefits of Opening a Demat Account
- Convenience: A demat account allows you to conveniently hold your shares & trade in the share market. This makes it easy to manage your portfolio.
- Better Speed: Online trading is much faster than traditional paper-based trading. You can buy and sell shares in real-time during market hours.
- Competitive Brokerage Charges: A lot of broking platforms incur brokerage fees and other charges. Choose your broker wisely before initiating your trading journey.
- Ease of tracking: Through a demat account, you can easily track your financial portfolio performance and valuation on a real-time basis.
- Safe environment: As an investor, it is important to ensure that you avail a safe and secure online trading experience. Holding shares in an electronic demat format mitigates risks associated with physical certificate storage, such as theft, forgery, and damage.
- Investing in IPOs: Holding a demat account makes you eligible to apply for IPOs online through the stock trading app.
Features of a Demat Account
- Electronic Holding: Securities are held in an electronic format, eliminating the need for physical certificates.
- Easy Transactions: Simplifies buying, selling, and transferring of securities with minimal paperwork.
- Reduced Risk: Lowers the risk of loss or theft associated with physical share certificates.
- Portfolio Management: Allows for easy tracking and management of various investments in one place.
- Access to Multiple Securities: Enables holding a diverse range of assets, including stocks, bonds, mutual funds, and ETFs.
- Nomination Facility: Allows account holders to designate a nominee for their investments.
- Annual Maintenance Charges: Typically incurs a small fee for account maintenance, which can vary by provider.
- Statements and Reports: Provides regular account statements and transaction reports for better financial tracking.
- Facilitates Credit: Automatically credits dividends, interest, and bonuses directly to the account.
- Integration with Trading Accounts: Can be linked to a trading account for seamless buying and selling of securities.
Types of Charges Involved in a Demat Account
- Account Opening Fee: A one-time charge for setting up the demat account, which may vary from one Depository Participant (DP to another).
- Annual Maintenance Charges (AMC): An annual fee for maintaining the account, often charged based on the type of demat account.
- Transaction Fees: Charges applied for buying or selling securities, usually a percentage of the transaction value or a fixed amount per transaction.
- Custodian Charges: Fees for holding and safeguarding the securities, which may be included in the AMC or charged separately.
- Dematerialization Charges: Fees for converting physical shares into electronic format, typically charged per certificate.
- Exit/Closure Charges: A fee that may be applicable if you decide to close your demat account.
- Inactive Account Charges: Some DPs charge fees for accounts that remain inactive for a certain period.
How to Select the Right Demat Account
Deep drive research on Depository Participants (DPs): Look for reputable DPs, such as banks or brokerage firms, with a strong track record with good customer service.
Compare Fees: Review the account opening fees, annual maintenance charges (AMC), and transaction fees. Choose a DP with competitive pricing.
Evaluate Services: Check if the DP provides additional services like research, trading platforms, mobile apps, and customer support.
Check Account Features: Check if the demat account has the ability to hold multiple types of securities and ease of fund transfer.
Ensure Optimum Technology and Security: Ensure the DP uses secure technology and has robust cybersecurity measures in place to protect your investments.
Reviews: Look for feedback from current and past users to gauge the reliability and efficiency of the DP.
Understand Account Opening Process: Familiarize yourself with the account opening and transaction processes to ensure they are user-friendly.
Customer Support: Ensure the DP provides on time customer support through various channels (phone, email, chat) for quick assistance.
Offers and Promotions: Some DPs may offer promotional benefits, like free transactions for a certain period or waived fees, which can be advantageous.
Long-term Compatibility: Consider how well the DP aligns with your long-term investment goals and whether they can adapt to your changing needs.
Common Myths About Demat Accounts
- Demat Accounts Are Only for Stocks: Many believe demat accounts can only hold stocks. In reality, they can also store bonds, mutual funds, ETFs, and other securities.
- Demat Accounts Are Expensive: While there may be maintenance fees, many brokers offer low-cost or even free demat accounts. It is essential to compare options.
- Opening a Demat Account Is Complicated: The process has become quite streamlined and can often be completed online in a few simple steps.
- Demat Accounts Are Only for Experienced Investors: Beginners can benefit from demat accounts just as much as experienced traders, as they simplify the buying and selling of securities.
- All Demat Accounts Are the Same: Different providers offer varying features, fees, and services. It's essential to choose one that suits your trading style and needs.
- You Can Lose Your Investment in a Demat Account: While the demat account itself does not hold any market risk, the securities within can fluctuate in value. The risk lies in the investments, not the account.
- Physical Shares Are Better Than Demat Shares: Demat accounts offer greater security, easier transferability, and reduced paperwork compared to physical shares.
- Demat Accounts Are Only for Indian Markets: While demat accounts are popular in India, many countries have similar systems for holding electronic securities.
Common Terminologies of a Demat Account
You will frequently see the following terminology when using a demat account:
Depository: Currently, the Central Depository of Securities Ltd., (CDSL) and the National Depository of Securities Ltd, (NSDL) are the two depositories registered with SEBI. These depositories hold your demat account on your behalf.
Depository Participant(s)(DP): A Depository Participant (DP) acts as an intermediary between investors and the depository, facilitating the opening and maintenance of demat accounts. They handle transactions like buying, selling, and transferring securities on behalf of clients. DPs can be banks, financial institutions, or brokerage firms that offer various services related to securities management.
Portfolio Holding: Portfolio holding in a Demat account refers to the collection of all the securities and assets held electronically by an investor. It includes shares, bonds, mutual funds, and other financial instruments. This allows investors to track their investments' performance and manage their portfolio efficiently from a single account.
Unique ID: Every Demat account holder is assigned a unique verification identity number, which facilitates the identification and crediting of securities during transactions. This 16-digit number is distinct, with the first eight digits representing the Depository Participant (DP) ID and the last eight digits representing the client ID.
Demat Account Statement: A statement sent by the DP each month to account holders highlighting the holdings and transactions during that period.
Delivery Instruction Slip (DIS): This is an authorization slip issued by the investor to the DP to debit or credit shares to the trader’s demat account for transactions.
Pledge: The procedure of pledging shares held in a demat account with a lender to secure loans against those shares.
Settlement: The process of transferring shares and funds between the buyer's and seller's demat accounts following a trading transaction.
