What is Demat Account?

Demat, or dematerialised account, is a form of an online portfolio that holds a customer’s shares and other securities. It has negated the necessity of holding and trading physical share certificates. Demat trading was first introduced in India in 1996, for NSE transactions. As per SEBI regulations, all shares and debentures of listed companies have to be dematerialised in order to carry out transactions in any stock exchange from 31st March 2019.

Demat account is used to hold shares and securities in an electronic (dematerialised) format. These accounts can also be used to create a portfolio of one’s bonds, ETFs, mutual funds, and such similar stock market assets.

Features of Demat Account

The features of opening a Demat account are-

• Easy Access

It provides quick & easy access to all your investments and statements through net banking.

• Easy Dematerialization of Securities

The depository participant (DP) helps to convert all your physical certificates to electronic form and vice versa. 

• Receiving Stock Dividends & Benefits

It uses quick & easy methods to receive dividends, interest or refunds. It is all auto-credited in the account. It also uses electronic clearing service (ECS) for updating investors’ accounts with stock splits, bonus issues, rights, public issues, etc.

• Easy Share Transfers

Transfer of shares has become much easier and time saving with the use of demat account.

• Liquidity of Shares

Demat Accounts have made it simpler, faster and convenient to get money on selling shares.

• Loan Against Securities

After opening a demat account, one can also avail a loan against the securities held in your account.

• Freezing Demat Account

One can freeze a certain amount or type of their demat account securities for a certain period of time. This eventually will stop the transfer of money from any debit or credit card into your account.

How Does A Demat Account Work?

• Trading with a Demat account is comparable to trading in person, except that a Demat account is electronic. You start trading by entering an order into your online trading account. Both trading and Demat accounts must be linked for this reason. When an order is placed and it is processed by the exchange.
  
  
• Before final processing of the order, the Demat account information, the market price of shares, and the availability of shares are checked. Following the conclusion of the procedure, the shares are shown in your statement of holdings.
  
  
• When a shareholder intends to sell shares, a delivery instruction letter detailing the stock must be given. The account is then debited for the shares, and the cash value is credited to the trading account.
  
  
• There are three types of Demat accounts that you can open, and if you are an Indian resident, you will be primarily dealing with equity trading and investment. So, you can find these three accounts.

Documents Required for Opening a Demat Account

• PAN card
• Aadhar card
• Address Proof
• Passport size photos
• ID proof

Types of Demat Account

An investor can opt to open demat account of any of the following types-

• Regular Demat Account

All residing Indian citizens are eligible to open regular Demat accounts.

• Repatriable Demat Account

Non-resident Indians can open Demat accounts of repatriable types. One can transfer money from overseas through such accounts, provided it is linked to an NRE bank account.

• Non-repatriable Demat Account

Non-repatriable accounts are also for NRIs, however, these accounts cannot be used to transfer funds from abroad. An individual has to link an NRO bank account to own and operate this type of Demat account.

Customers holding Demat accounts need to open a trading account, to buy or sell securities from the stock market. While respective Depositories and Depository Participants regulate Demat accounts, a trading account follows the regulations mandated by SEBI.

Benefits of Demat Accounts

Investors who opt to open Demat account can enjoy several benefits. Here are some of the most common benefits.

• Demat accounts eliminate the risk of damage, forgery, misplacement, or theft of physical shares.
• The electronic system is also considerably simpler and can be completed within hours. It has eliminated several time-consuming operations, which has made the entire process streamlined and time-saving.
• Demat accounts come with remote access benefits, provided individuals have a registered net banking facility with the concerned financial institution.
• Investors can merge bank accounts with dematerialized accounts to facilitate electronic fund transfer.
• Customers can benefit from a nomination facility if they open a Demat account online.
• Account-holders with a specific unit of securities in their portfolio can opt to freeze their accounts for a specific period. This can prove helpful to avoid any unwanted transaction into one’s Demat account.

Demat Account Number and DP ID

Investors are also issued a DP ID, or Depository Participant ID, by their preferred broking firm or other financial institutions. DP ID forms a part of one’s account number, as this ID denotes the first eight-digit of the account number.

Both depository and depository participants use this data when an investor converts physical shares to Demat, transfers shares from one Demat account to another, or transfer money from Demat account to bank account.

Demat Account Charges

Although any investor can open a free Demat account, there are certain charges that are levied on that account to ensure its smooth operations. Each brokerage firm (including banks) comes with its unique brokerage charges. Here are some of those–

• Annual Maintenance Charges

Almost every firm levies a fee as an annual maintenance charge for Demat account. Depositories follow specific guidelines to calculate the fee applicable for each investor.

SEBI has implanted a revised rate for Basic Services Demat Account, or BSDA, from 1st June 2019. According to the revised guidelines, no annual maintenance charge will be applicable for debt securities of up to Rs.1 lakh, while a maximum of Rs.100 can be levied on holdings of Rs.1 lakh to Rs.2 lakh.

• Custodian Fees

Depository partners charge a custodian fee as a one-time or annual basis. The sum is paid directly to the depository (NDSL or CDSL) by the company.

• Demat and Remat charges

Such expenses are levied as a percentage of the total value of shares purchased or sold, to cover all digitisation or physical print costs of securities.

Other than the above-mentioned fees, an investor is also liable to pay fees like credit charges, applicable taxes and CESS, rejected instruction charges, etc.

Demat accounts play a crucial role in stock market investments, as it is one of the most common methods of investing in the stock market. However, recently, several online platforms provide the benefit of online trading without such accounts.