What is Demat Account: Meaning, Types and Benefits
A Demat account, short for a dematerialized account, is an account opened with a depository participant to hold financial securities in electronic format. Opening a demat account has many benefits including ease of tracking investments, quicker trading settlement cycles, and avoiding issues related to physical certificates. A Demat account helps facilitate the trading and tracking of securities in a convenient digital manner. This article will explore what is demat account, its purpose, types, benefits, and more.
Key Highlights
- Demat account allows paperless holding of financial securities electronically instead of physical certificates.
- Dematerialization refers to the process of converting physical share certificates into electronic format.
- Demat account enables convenient, secure, and hassle-free online trading and transactions of securities.
- Banks, Depository Participants, and Depositories facilitate the opening and operations of a Demat account.
- Identity proof, address proof, PAN card, and bank details need to be submitted to open a Demat account.
- Benefits include eliminating risks with physical certificates, greater accessibility and transparency, ease of trading, and corporate action updates.
Table of Contents
What is a Demat Account?
Demat or Dematerialized account refers to a digital account used by investors to store all their investments in electronic format rather than physical certificates. A Demat account holds an individual’s investments such as stocks, government securities, exchange-traded funds, bonds, and mutual funds in one place.
By enforcing improved governance by SEBI, Demat facilitated the digitization of the Indian stock trading market. Furthermore, by storing stocks in an electronic format, the Demat account decreased the risks associated with theft, damage, and malpractices.
What is Dematerialization?
Dematerialization refers to the process of converting paper share certificates into electronic share certificates. It involves the conversion of securities held in physical form into electronic form for ease of holding and transacting.
Once dematerialized, the investor’s Demat account gets credited with the converted electronic securities based on the physical certificates surrendered. Physical share certificates get permanently destroyed after dematerialization to avoid misuse. This occurs when investors start transacting the securities electronically via a Demat account. Therefore, dematerialization enables the conversion of paper share certificates into digital securities for ease of storage and transactions.
How Does a Demat Account Work?
A Demat account works just like a bank account to enable the holding and transactions of financial securities electronically instead of physically handling them. All the assets held under a demat account are identified by an ISIN (International Securities Identification Number).
- When investors buy shares or securities in electronic form, they get credited to their demat account automatically.
- This is similar to money getting credited to the bank account on receiving payment. When investors sell securities, equivalent electronic certificates get debited and the buyer’s account gets credited.
- A trading account needs to be linked to the demat account to facilitate actual buying and selling, enabling seamless electronic transactions.
Therefore, a demat account enables paperless transactions which brings in transparency and convenience for investors.
How to Open a Demat account?
Opening a demat account involves a few simple steps. The following are the key steps:
Step 1: Choose a Depository Participant (DP)
DPs are agents offering demat account opening services. Banks, financial institutions, or stock brokers registered with SEBI act as DPs. Evaluate a few and choose a reliable DP.
Step 2: Fill up Account Opening Application Form
Visit the DP office or download the online form. Fill in all details correctly like personal information, bank account details, nominee details, etc. Read the terms and sign the form.
Step 3: Submit KYC documents
Attach self-attested KYC documents with the account opening form – Identity proof, Address proof, PAN Card copy, and cancelled cheque leaf/Bank statement.
Step 4: In-person Verification
DP will do in-person verification for validating KYC documents and application form details.
Step 5: Account Activation
After verification, DP provides a unique Client ID and PAN is mapped as account password for login. The account gets activated within a few days.
Step 6: Link Trading account
Link trading account to demat account provided by any stock broker to start transacting securities electronically.
Types of Demat Accounts
There are numerous varieties of demat accounts, each tailored to the unique requirements and preferences of investors. Investors must comprehend the various kinds of demat accounts to maximize their investing strategies and make well-informed decisions. There are three main types of Demat accounts:
1. Regular Demat Account
This standard account allows resident Indian investors to organize and manage their portfolios. It is opened through a Depository Participant or stockbroker. Investors can hold different securities like stocks, bonds, mutual funds, and government assets. It provides basic trading and holding functions.
2. Repatriable Demat Account
Non-resident Indians (NRIs) open this account type if they want to invest in Indian securities and transfer funds back abroad. It allows NRIs to repatriate money out of India into foreign currency.
3. Non-Repatriable Demat Account
This account is also meant for NRIs but does not allow transferring money abroad. The funds need to be utilized only within India. Opening this account has easier documentation versus the repatriable type. Non-repatriable accounts require linking to NRO accounts for routing all transactions using money earned in India for investing in domestic stocks.
Documents Required to Open Demat Account
To open a demat account, the following documents are required:
- PAN Card Copy
- Voter ID/Aadhaar/Passport/Utility bill/Rent agreement
- Aadhaar/PAN/Driving License/Passport
- Cancelled Cheque/Bank statement, With IFSC, MICR code, and name printed
- Recent Passport size photographs
For a Company account, one needs to submit the Incorporation proof, MoA, Board Resolutions, etc.
Benefits of opening a Demat Account
There are several benefits to opening a Demat account. The key benefits include:
- Hassle-free online securities trading without physical certificate movements.
- Eliminates risks like certificate forgery, loss of certificates, etc. associated with paper certificates.
- Savings on stamp duty costs compared to physical share transfers.
- Lower brokerage charges on account of electronic share dealing.
- Easy to monitor with online access and portfolio reporting tools.
- Seamless processing for corporate actions like bonuses, stock splits, etc. leading to faster settlements.
- Consolidated view and tracking of investments in multiple securities in one place.
- Zero risks of theft or mishandling compared to physical certificates lying idle.
Therefore, a demat account enables transparent dealings, greater operational ease, and security for your investments.
Tips for Choosing the Best Demat Account
When searching for the best demat account provider, consider the following parameters:
- Opt for brokers with quick, online account opening including e-KYC for efficiency.
- Compare fee structures and choose competitive, transparent rates.
- Verify prompt customer assistance via calls, emails, or chat.
- Evaluate user-friendly trading platforms that enable real-time data access, easy order execution, and portfolio tracking.
- Check for enhanced security measures like 2-factor authentication and encryption.
- Consider additional services like IPO applications or advisory.
- Read reviews and seek investor recommendations assessing aspects like- reliability, reputation, and transparency.
Conclusion
Demat accounts digitize and centralize holdings, which revolutionizes the way investors manage their securities. With a variety of options catered to distinct requirements, investors can select the best fit. Demat account has made investing more secure by eliminating dependence on physical certificate movements.
FAQs on Demat Account
The meaning of a Demat account is a Demat account. It stores all types of securities in an electronic format saving time and money while being very secure.
Demat account stands for Dematerialized account. It means everything is stored in electronic form.
To open a Demat account, you need to approach a DP or depository participant. Just complete the procedure as mentioned by the DP to get your Demat account opened.
To open a Demat account, you first and foremost need a bank account. Then, a Depository Participant is the most crucial link for opening a Demat account. They are registered with Depositories and help investors open Demat accounts. So the participants for opening a Demat account include a bank, a DP, and Depositories. A bank holds all your money, the Depository holds all your securities, and a DP not only links the two but can help you trade in the stock market.
A depository participant helps an individual investor open a Demat account with depositories. They got registered with depositories. They can change the Demat account on behalf of the investors. Without a DP, it would be impossible to open a Demat account with Depositories. A DP can be a bank, a stockbroker, or a Non-Banking Financial Institution.
Demat accounts hold all securities electronically, making them relatively safe. It’s beneficial to customers by helping them store and invest in various forms of securities. Moreover, it can get accessed from any physical location.
There is only one charge involved in maintaining a Demat account. You have to pay a yearly charge known as Account Maintenance Charges (AMC). Every DP has a different AMC based on the services they provide. A few stockbrokers who provide Demat accounts also have zero annual maintenance fees for life.
A DP, like a stockbroker, can assist you in trading in the Stock Market. All stockbrokers provide a 2-1 account facility. It means that the depository participant offers both Demat and Trading accounts. Your Trading account helps to buy and sell shares on the stock market, and your Demat account allows for storing these shares. You can choose a stockbroker based on your requirements.
No, there are fees involved with setting up and keeping a Demat account. These fees change depending on your stock broker.
Yes, you are permitted to open more than one Demat account with several brokers. However, it’s critical to manage them effectively and adhere to laws.
A Demat account can be opened by citizens of the nation, non-resident Indians (NRIs), and overseas investors.
Yes, you can link your Demat account with a trading account. This linkage allows you to seamlessly transact and trade securities.