Either we know too much about Demat Accounts or we don’t know about it at all. If you are just getting started with the stock market, you would have come across the term “Demat Account”.
And now, you must be thinking, what is Demat account, why is Demat account needed, is Demat account safe?
In this definitive guide, I will explain everything you need to know about Demat Accounts. That too, in the easiest language possible. So you know the basics before investing the money you have saved.
What is a Demat Account?
Demat Account is short for Dematerialized Account that is used for holding shares and securities in an electronic format. It is just like a bank account only to hold shares. As you hold money in your bank electronically, a Demat Account is used to hold shares.
Just that, you can’t take out your shares in physical format as you can take out cash from your Bank Accounts.
Before Demat Accounts, we used to receive shares in a physical format (share certificates) from the companies. It was a long that used to take 30-45 days to receive the share certificates that looked like this:
It was very difficult to trade with these physical/materialized shares. By the time you had your share certificate, prices used to change.
Hence, forcing investors to hold their shares for a longer time than trading as we do now. This was the process of obtaining the shares before they were dematerialized:
Dematerialization was introduced in the Depository Act of 1996 which completely eliminated the physical certificates and troubles associated with it.
The whole process of buying, selling, or transfers of shares became easier and it also reduced the risks associated with physical share certificates.
Now, you can buy and sell shares within a few seconds with the help of your trading account.
The whole maintenance part of the accounts and shares was given to depositories – NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
The services of buying, selling, and transferring of shares were supposed to be provided through Depository Participants (Stock Brokers).
A few years back, the depositories made it compulsory to have converted all the physical share certificates into the dematerialized format.
Difference between the Trading Account and Demat Account
People often get confused between the trading account and Demat Accounts. However, they work together so let’s understand the difference here.
The trading account is an account that is linked to your bank account and through which you trade shares and Demat Accounts are just to hold the shares.
Whenever you buy a share, the money goes through deducted through the trading account in return of a share which is further added to your Demat account.
And whenever you sell a share, money is added to your trading account and the share is deducted from your Demat account.
This diagram would make things clear:
Nowadays, most of stock brokerage firms like Upstox provide a Demat account and trading account together. And, that is the best thing to do.
How does Demat Account work?
As explained above, the Demat Account works as your wallet where you store your shares. When you buy a share (from your trading account), the broker or depository participant credits to your Demat account.
The same is reflected in your statement of Holdings.
Generally, shares are credited in T+2 working days into your account. Where T stands for the date of the Transaction or trading day.
However, you can sell shares even before they are officially credited into your account. Buying and selling of shares on the same day are known as Intraday trading.
Is Demat Account Safe?
Yes! It is the safest way to hold your share than a physical share certificate. But you should consider opening your Demat account with a good Depositor Participant/Broker.
When physical share certificates were issued, there were more chances of theft, forgery, and non-delivery of the certificates. These things would never happen in the case of having an online system.
Why Demat Account is necessary?
The very first reason would be the guidelines of SEBI (Securities and Exchange Board of India). You cannot buy or sell shares in physical format anymore.
So, if you wish to trade in India, you need a Demat Account and you can’t skip this.
Also, there are a lot of benefits of having an account:
The dematerialized system reduces risks such as loss of share certificate, theft, forgery, etc. It reduces the delay in the registration of shares. Let’s have a look at some of the major benefits:
A convenient way to hold shares
Physical Certificates had a lot of issues. You don’t have to maintain a briefcase as our parents. Everything is online and safe.
Did you know? Earlier, there were plenty of risks associated with physical certificates such as mutilated delivery of certificates, fake certificates, delays in the process. Also, theft in some cases.
With things being online, it is obvious that a lot of paperwork was reduced. Earlier, you had to buy physical stamps from the Stock Exchange or Brokers to buy or sell shares.
Also, the Transfer deed was required in order to buy or sell shares.
Now all this is taken care of by brokers and all you have to do is click on Buy and Sell.
Reduced transaction cost
With the reduced paperwork, obviously a lot of transactional costs were reduced.
Even one share can be bought & sold; No “odd lot” problem
Earlier you were supposed to purchase shares in lots. 1 lot contained a specific number of shares and investors were forced to buy shares in lots.
Now, you can buy even 1 share of any listed company.
I hope this section cleared why to open a Demat account and why it is needed.
Also, a Demat account is extremely necessary for trading. Without it, there’s no possibility to trade and invest in India.
How to open a Demat Account?
For opening an account, you would need to submit KYC (Know Your Customer) documents and a small account opening fee which is usually waived off in one or other ways.
- PAN Card
- Bank Account Details & Cancelled Cheque
- Address Proof
- Basic Details
With the system being online, a lot of Depository Participants ask for Aadhaar Card too. Don’t worry! It’s safe.
There are a lot of technology-focused companies that provide online account opening such as Upstox or Zerodha with the help of your Aadhar Number. The great part is, they also provide zero-brokerage service. They won’t charge you for equity deliveries. There would definitely be other fixed charges by Depositories.
Frequently Asked Questions
1. How many Demat Accounts can be opened by one person? Can we have multiple Demat Accounts?
Yes, we can have multiple accounts with multiple brokers. It is just like a bank account.
In fact, experienced investors prefer to have multiple accounts for investing based on different purposes. For example, one account for long term investment and the other one as a short term or intraday trading.
2. Can the Demat account be opened jointly with more than one person?
Yes, you can open a joint account. Depositories allow a maximum of 3 account holders with 1 main holder. However, you won’t be able to open such accounts online and will have to follow the offline process.
3. Can the Demat account be transferred from one person to another?
Demat Account cannot be transferred from one person to another as it is allotted to a single person or group of people. However, we can transfer shares from one account to another.
4. Is the Demat account necessary for mutual funds?
Though you can invest in mutual funds through your Demat account, it is not mandatory to have an account.
5. Can the Demat account be opened online?
Yes! Thanks to technology and the Aadhar system, the account can be opened online with the help of Aadhar OTP. Not all the stockbrokers provide this option but technology-driven brokers such as Upstox or Zerodha allow you to open an account completely online.
I hope I cleared a lot of things. You can read one more article about fixed fixed double strategy in the stock market.
Did I miss something? Are you going to open your Demat Account today? Let me know in the comments below.