Opening a demat account is the first step towards investing in the stock market, mutual funds, IPOs and non-convertible debentures in India.
In simple words, a Demat account is like a bank account. The biggest difference is that instead of keeping money, you hold shares, mutual funds or bonds electronically in a demat account. Holding stocks and mutual funds in a demat account comes with several advantages including high security and faster transactions.
The introduction of demat accounts has done away with the traditional share certificates that were required to be sent every time a company transferred shares. It has now been removed from demat accounts in place of physical share certificates.
When you have to receive corporate benefits like dividend, the company gets the list of shareholders from NSDL and it credits your bank account with the dividend. Hence, understanding Demat accounts couldn’t be easier.
Demat account works like a bank account where your bank balance is a mere entry in the bank passbook and you do not have physical cash with you. Securities are also held in electronic form (in dematerialized form) and debited or credited in the same manner.
Why should you have a Demat Account?
As per the guidelines of the Securities and Exchange Board of India, you cannot buy and sell shares in physical form on the exchanges. This means that share certificates, which were the norm earlier, are not allowed to be traded. It means you need to demat shares to buy and sell through BSE or NSE.
How do demat accounts work?
When you buy shares, the broker credits your demat account with the shares and these are reflected in your statement of holdings. If you are trading through an internet based platform, you can view your holdings online. Typically the broker credits the shares on T+2, that is trading day + 2 days after that.
When you sell the shares, you need to give your broker a delivery instruction note, where in you fill the various details of the stock sold. Your account is debited with the shares and you are then paid the money for the shares sold. If you are trading through the internet, the account will automatically reflect a debit of the shares and amount credit to your account.
There are two Depositories in India – the National Securities Depositories Limited (NSDL) and the Central Depository Services Limited (CDSL), through whom the shares are held by the various depository participants.
Benefits of opening Demat account
1) No worries in keeping the shares in physical forms
One of the biggest advantages is that you should not be worried that your shares would be stolen or damaged. In the elctronic form shares are very safe.
2) No odd lot issues, and shares even one share can be bought and sold
You can buy and sell shares in lots of 1 in the electronic form. You cannot do that in the physical shares. how can you sell 1 share, when you have a certificate that shows 5 shares.
3) No stamp duty on transfer
Stamp duty is paid at the time of buying and selling the shares. So, you really need not go the stock exchanges and buy physical stamps as was the case earlier.
4) No transfer deed required
Like stamp duty, there is no need for a transfer deed as well.
How many depositories are there for demat accounts?
There are mainly two depositories in the country who handle demat accounts. Your accounts are generally opened by the broker at the NSDL or the CSDL. They are than held in electronic form at these two depositories. When there is a book closure for payment of dividend or bonus they retrieve the data from the two depositories and pay dividends accordingly. All of the Depository Participants have to open a demat account either with the CDSL or the NSDL.
Usually, Demat accounts have an annual maintenance fee to be paid by the customer to keep the account active. Irrespective of whether you use it or not, as long as you have a demat account, you have to pay DP.
Can You Get Free Demat Account Service?
Yes, some brokers in India provide free demat accounts. Under this plan, the customer does not have to pay any annual fee. Certain conditions may apply including one time fee at the time of account opening or refundable deposit. Contact the broker for more details.
Steps to open demat account
- Select Depository Participant
First select where you want to open the demat account and then select the Depository Participant with whom you want to open the demat account. Most brokerages and financial institutions provide the service.
- Fill the Demat Account Opening Form
Then fill the demat account opening form and submit it along with copies of required documents and a passport size photograph. You should also have a PAN card. Carry the original documents for verification as well.
- Read the rules and regulations
You will be provided with a copy of the rules and regulations, terms of the agreement and the charges to be borne by you.
- Step 4. Personal Verification
During the process, a personal verification will be done. A member of the DP’s staff will get in touch with you to verify the details provided in the demat account opening form.
- Step 5. Access your Demat Account
Once the application is processed, the DP will provide you with a Demat Account Number and a Client ID. You can use the details to access your demat account online
It has become amazingly simple to open a Demat cum trading account in Zerodha, Angel Broking, Groww, Upstox and other online platforms. The process is completely online and paperless and will not take more than a few minutes. Most of these services come with free demat account and zero maintenance charges.
Most nationalized and private banks also provide demat services
Best bank in india for demat account
- ICICI Bank
- HDFC Bank
- Kotak Mahindra Bank
- Axis Bank
- SBI Bank
They are all very similar in their offering, fees, trading platforms and customer services.
Note: Demat accounts are maintained by National Securities Depository Limited and Central Depository Services Limited and the banks act as intermediaries.
How Demat Account Works?
First of all, it is important to note that along with a Demat account, you also get a linked trading account, which has a unique login ID and password. It is used to buy/sell shares. A demat account is used to hold the purchased shares.
So when you want to buy or sell a particular share, you need to log in to your trading account, which is also linked to your bank account. When a ‘Buy’ or ‘Sell’ request is placed for a particular stock in the trading account along with other details, your Depository Participant (DP) immediately sends it to the stock exchange.
If the order is ‘Buy’, the stock exchange finds a seller who is willing to sell shares in equal quantity and sends the order to the clearing house to debit the particular number of shares from the seller’s demat account and credit it. Demat account of the buyer. And in this way there is only one trade in the stock market.