What is a Demat Account?

A Demat account is a platform to hold shares and securities electronically. As an investor, you can manage securities and invest in a diversified portfolio of stocks, bonds, mutual funds, and exchange-traded funds (ETFs). In this blog, we will provide a comprehensive guide on what is Demat account, the benefits and functions, and the overall process of dematerialisation.

Understanding the Meaning of a Demat Account

Understanding the Demat account meaning is important to invest in a diversified portfolio and perform share transfers in a more simplified manner. It is an online portfolio where you can store your shares and other securities electronically.

In India, Demat account trading was first introduced in 1996 to reduce the risk of forgery, damage, and loss of physical securities. The Securities and Exchange Board of India (SEBI) has made regulations to dematerialise all the shares and debentures of the companies for stock market transactions from 31st March 2019.

What is Dematerialisation?

Dematerialisation is the full form of Demat account, which is the process of converting physical share certificates into an electronic version and securely storing them in a central repository. Dematerialisation has made investing and trading easy and convenient. 

Share trading and investing were completely done in person before the internet age. The investor required physical share certificates, which served as ownership documentation, after purchasing the shares. However, managing the physical share certificates presented a number of difficulties.

The difficulties of handling a huge number of paper-based documents lead to the necessity of dematerialisation. The accumulation of papers raises the possibility of losing crucial records, which might cause problems for the Indian stock market and related companies. 

Additionally, by lowering the stamp tax on share transactions, the dematerialisation process helps save money. Obtaining duplicate certificates if the originals are misplaced also saves time and money.

History of Demat Accounts in India

The Depositories Act of 1996 increased the ease and effectiveness of trading and settlement by guaranteeing the depository concept’s success in Indian capital markets. The efficiency of the depository system has significantly increased due to the Depositories Act of 1996 and the Depository Ordinance of 1995.

After the enactment of the Depositories Act in August 1996, the National Securities Depository Limited (NSDL) was established in November 1996. With the backing of key banks and founding organisations like the National Stock Exchange (NSE), this system converted paper-based share ownership into digital accounts for safer, more effective trading.

In order to provide safe, electronic securities holding and trading services, the Central Depository Services (India) Limited (CDSL) became India’s first listed depository in 1999 and improved market efficiency and accessibility. CDSL was first promoted by the Bombay Stock Exchange (BSE).

Furthermore, as of March 31, 2019, the regulations to dematerialise all company shares and debentures for stock market transactions have been made by the SEBI.

Importance of a Demat Account

Now that you know the Demat account meaning and its history, let us understand the importance of Demat accounts in India. You should use a Demat account to hold shares and securities more conveniently. Here are the reasons why you should use a Demat account:

• Since it is an electronic format of holding securities, you keep your securities safe by eliminating forgery, loss, and theft.
• You can also transfer securities while staying at home or work. You can place a buy or sell order anytime using your smartphone.
• A Demat account will also allow you to receive the securities within one business day, since stock exchanges operate on a T+1 or T+2 trading settlement cycle.
• The dematerialised format of holding securities also helps track your holdings on the same platform.
• Your broker will send you the automatic updates on corporate activities, including dividend declarations, bonus shares, and rights issues, about your Demat account.

Features of a Demat Account

As an investor, you can hold securities in electronic format with the help of a Demat account. Holding securities electronically allows you to avoid the time-consuming process of monitoring physical security.

Here are the essential features of a Demat account:

• Convenience

Through net banking, a Demat account offers quick and simple access to all of your investments and statements.

• Facility to Nominate

The Demat account provides a nomination facility that helps the appointed nominee acquire securities in the absence or death of the investor.

• Electronic Settlement

You do not have to use any paper certificates in the dematerialisation of securities. Using demat accounts provides you with security and saves you from manual hassles.

• Smooth Transaction

A Demat account also allows you to use an electronic Delivery Instruction Slip (e-DIS). This slip keeps all of the information necessary for a smooth transaction of securities.

• Loan Availability

You can also apply for a loan by pledging your securities. Most online brokers allow investors to use this feature. Demat accounts of most of the online brokers have this feature.

• Utilisation of Multiple Assets

Using a Demat account enables you to hold a variety of instruments apart from stocks. You can hold mutual funds, ETFs, and even government securities.

• Freezing Feature

For a predetermined time period, you can freeze a specific kind or quantity of your Demat account securities. This will ultimately prevent funds from being sent into your account from any credit or debit card.

• Dividends and Benefits

It makes it simple and quick to get dividends, interest, or reimbursements. Everything is automatically credited to the account. Additionally, it updates investors’ accounts with stock splits, bonus issues, rights, and public issues through the Electronic Clearing Service (ECS).

How Does a Demat Account Work?

Now that you know what is Demat account, understanding its functions is also crucial. The goal of a Demat account is to improve trade and ownership transfer efficiency while doing away with the requirement for physical documentation. The following steps are involved in the process:

• Account Login

You can buy or sell a particular company’s shares; you should log in to the Demat or trading account which is linked to your bank account.

• Order Placement

Once you have placed the ‘Buy or Sell’ order in a trading account, the DP forwards it to the stock exchange immediately.

• Transfer of Securities

If you place a ‘buy’ order, the stock exchange will search for a seller who wants to sell your shares. If the price matches, the trading account will take it forward to the clearance houses to get it debited from the seller’s Demat and deposited to the buyer’s account.

Benefits of a Demat Account

Knowing the Demat meaning is important for buying and selling shares electronically.

These are some of the common benefits of using a Demat account:

• Storage Benefits

Using the dematerialised format allows you to store securities as much as you can. You may buy large volumes of shares, which can be problematic when you use a physical form of shares.

• Quick Transactions

The securities will be automatically debited or credited from your Demat account after the transaction. The lack of paperwork completes the settlement process in T+1 or T+2 days.

• Ease in Portfolio Management

You can also track the performance of the securities, monitor, and review them anywhere using a Demat account.

• Lesser Manual Intervention

A Demat account also eases the deposit of dividends, stock splits, bonus shares, and other investments in your Demat account.

• Wide Range of Investment Storage

Not only shares, but the Demat account can also store a variety of assets, including government securities, bonds, mutual funds, and exchange-traded funds. 

• Nomination Facility

You can simply keep track of all your trading activity in one location with a Demat account. You can keep track of your assets and make wise decisions by having access to a comprehensive history of all of your transactions, including purchases, sales, and transfers.

• Less Paperwork

Physical share certificates may be misplaced, destroyed, or falsified, and have to be stored by investors. All of your assets are simply and safely kept online with Demat accounts, with less paperwork.

• Automatic Updates

If an initiative of the company whose shares you are holding brings in a change to its stocks, such as a bonus issue, stock split, etc., it will be updated automatically in your Demat account.

Types of Demat Account

Since you are familiar with what is Demat and its function, you must also know its different types.

Depository participants offer four major types of Demat accounts:

• Regular Demat Account

The regular Demat account is used by Indian residents. These are usually beneficial for investment in multiple securities.

• Repatriable Demat Account

A repatriable Demat account is good for Non-Residents of India (NRIs) looking forward to investing in the securities market of India from any part of the world.

• Non-Repatriable Demat Account

This type of Demat account is also dedicated to NRIs, but they cannot transfer funds abroad. However, NRIs must link their non-repatriable Demat account with a Non-Resident Ordinary (NRO) bank account.

• Basic Service Demat Account

Small investors with securities valued at less than INR 4 lakh are the target market for the Basic Services Demat Account (BSDA). The account is a cost-effective choice for small investors and has a reduced account maintenance charge.

Documents Required for Opening a Demat Account

To open a Demat account with an online broker, you must submit some essential documents for verification. When opening a Demat account with PL, you must submit minimal documents. Here are the documents you need to submit:

• PAN Card
• Aadhaar Card
• Bank Details
• Digital Signature

How to Open a Demat Account?

The SEBI has mandated that every investor must open a Demat account to trade in the Indian stock market.

Here are a few steps you can follow to open a free Demat account:

Step 1: Select a DP

The first step is to find a DP for opening a Demat Account to hold securities through it. Pick a DP that provides you with a Demat and trading account service on a trading platform that is user-friendly.

Step 2: Open a Demat Account

Open a Demat account by providing precise personal information, bank account information, and KYC papers such as address proof, PAN card, and Aadhaar card.

Step 3: Form Submission

Send the completed account opening form and the necessary paperwork to the DP.

Step 4: Verification

The DP will verify your identification and address in person.

Step 5: Terms Agreement

Sign the terms and conditions of maintaining a Demat account in the DP-client agreement.

Step 6: Gathering Details

The DP will give you the Demat account details, such as the account number and login information, as soon as the account is opened.

Step 7: Start Trading

You can now engage in securities trading.

Demat Account Charges

A lot of brokerage firms open a Demat account for free.

However, they take other charges that are used for the maintenance of your account:

• AMC: Annual Maintenance Charges are charged annually by the broker to maintain your Demat account.
• Custodian Charges: Brokerage firms charge this amount and pay to the depository to ensure the security of electronic assets.
• Dematerialisation and Rematerialisation Charges: These charges are levied as a percentage of the total purchase and sale value of shares to cover all physical print costs of securities.

Demat Account Number and DP ID

These are the details included in a Demat account:

• Demat Account Number: This beneficiary ID is a mix of 16 characters. The first 8 digits are the DP ID, and the last 8 digits are the client ID of the investor.
• DP ID: The DP ID is given to the depository participant.

What are the Differences Between Demat Accounts and Trading Accounts?

There is a lot of confusion among investors who have just started their investment journey. One of them is the difference between a Demat account and a trading account. The table below shows the key differences between these accounts:

 Why Choose a PL Capital Demat Account?

You should choose a PL Capital Demat account due to the following benefits:

• Reliable broking platform with 80+ years of market experience
• Instant e-KYC via Aadhaar and PAN
• Support for video KYC and digital signature
• Free account opening and same-day activation
• Minimal AMC for the Demat account and zero AMC for trading
• Minimal documents required for account opening
• Provides deep insights and data-driven analysis for portfolio optimisation
• Live markets and quick order execution
• Access to a wide variety of securities, including stocks, mutual funds, futures and options trading

Conclusion

Understanding what is demat account and its use is crucial as it plays a vital role while investing in the stock market. It avoids the time-consuming process of handing physical certificates and addresses the risk of loss and damage. You may use the Demat account from PL to invest in securities like equity and F&O. Download the PL application from the app store and open a Demat account for free! 

Frequently Asked Questions

1. Who can open a Demat account?

Any individual, Hindu Undivided Family, or domestic corporate entity can open a Demat account in India.

2. Can Demat accounts be opened jointly?

Yes, a joint Demat account can be opened jointly by two or more individuals, where each of them has equal rights of trading.

3. Is a Demat account compulsory to apply for an IPO?

Yes, it is mandatory to open a Demat Account for an IPO.

4. Is a Demat account compulsory for availing a Systematic Investment Plan?

No, it is not compulsory to have a Demat account for mutual fund investments. Completing the KYC formalities can allow you to invest in mutual funds. However, it is recommended to open a Demat account to hold your investments electronically.

5. What is a Demat account used for?

The purpose of a Demat account is to hold shares and securities in a digital format and keep track of security investments.

6. Is a Demat account free?

The cost of opening and maintaining a Demat account completely depends on each broker. However, most brokers do not charge any fees to open an account.

7. Is a trading account required with a Demat account?

Yes, to engage in the majority of stock market operations, a Demat account and a trading account must be linked. The reason is that the trading account is used to place buy or sell orders on the exchange, while the Demat account holds your shares electronically.

8. Can I have multiple Demat accounts?

Yes, by having multiple Demat accounts linked to the same PAN in India, you can manage alternative investment strategies, access different broker services, and separate portfolios. Every account has to be associated with a distinct DP.

9. Where can I find my Demat account number and DP ID?

You can find your Demat account number and DP ID on your account statements and in the profile or account details section of your broker’s app or website.