A Demat account, which is the abbreviation of Dematerialized account, is a must have instrument for present day investor.
This enables people to trade securities as well as own them directly in digital form, thereby doing away with share certificates.
This article aims to focus on Decentralized Account or Demat account and its kind, benefit, uses and its way of opening.
What is a Demat Account?
A Demat account is an account which allows holding of securities in electronic / dematerialized form such as share, bonds, mutual fund etc.
It makes trading and investment easier by cutting on paperwork and at the same time it provides security.
How to Open a Demat Account? Steps?
Choose a Depository Participant (DP):
- A Depository Participant is also an intermediary that represents a depository; the two principal depositories in the Indian market include NSDL and CDSL. Some of the companies that may act as a DP include the following; Banks and brokerage firms and other financial institutions.
Fill out the Application Form:
- Hence, get an account opening from the DP of your choice and fill in your full name, address, PAN card number and phone number.
Submit Required Documents:
- Identity Proof: PAN card, Aadhaar card or passport.
- Address Proof: Electricity bills, Aadhaar, or the rental receipts.
- Bank Proof: Cancelled cheque or bank statement The photo copy of cancelled cheque or the copy of the first page of the bank statement of the applicant enclosed herewith shall be authenticated from the respective Bank.
- Photographs: Passport-sized photographs.
In-Person Verification (IPV):
- There are some DPs that ask applicants to go through an identification and document verification session physically.
Sign the Agreement:
- An understanding of the terms meant for the Demat account will require a client to sign a commitment document.
Receive Your Account Details:
- You get the demat account number along with the client ID as soon as the account is opened and these details grant your account access online.
Types of Demat Accounts
Regular Demat Account:
- Specifically developed for the consumers of India only.
- Provides a means for the trading and settlement of securities in an electronic platform.
Repatriable Demat Account:
- For Non-Resident Indians (NRIs).
- Execute foreign funds transfer but only when the resulting activity is connected to an NRE bank account.
Non-Repatriable Demat Account:
- Also, for NRIs.
- Does not allow fund transfer abroad and shall be maintained linked to an NRO bank account.
Basic Services Demat Account (BSDA):
- They include a low-cost account for small investors, and many more.
- Thousands of shareholders cannot afford paying the maintenance charges as as they hold low value stock with them.
Features of a Demat Account
Secure Storage:
- Securities are in digital form thereby having low chances of being lost or stolen form the market.
Ease of Access:
- It is also possible for the investors to track their stakes through online web-based platforms as well the mobile applications.
Nomination Facility:
- Facility through which an account holder can choose a beneficiary for the respective shares.
Multiple Asset Classes:
- Structured products such as stocks, bonds, ETFs, mutual fund can be held in Demat account.
Auto-Credits:
- Apparently, dividends, bonus shares, or interest earned on the securities held are credited automatically.
Transaction History:
- Contains a record of all purchases, sales, as well as all activities with regard to the corporate entities.
Importance of a Demat Account
Simplified Trading:
- Does away with paper-based certificates that hit hinders efficient on-line transactions.
Reduced Risks:
- Helps to minimize risks and hazards related to certificates such as loss, damage, forgery or theft of certificates.
Cost-Effective:
- Eliminates expenses connected to stamp duties and other paper works.
Mandatory for Trading:
- In any case, having a Demat account is mandatory for buying or selling stocks of the companies floated in the stock exchanges.
Efficient Record Keeping:
- Saves all security and transactions and thus makes the management of the portfolio easier.
Uses of a Demat Account
Holding Investments:
- Is effectively like an online safe, where all sorts of securities, like stocks, bonds, ETFs, mutual funds, are stored.
Trading:
- Enables trading in shares through linked broking and/or buying/selling accounts.
Corporate Actions:
- Reduces operations such as dividend payouts, stock splits, or right issues because of automatous updates.
Loan Collateral:
- Equities in a Demat account can be used as a security for financing.
Portfolio Diversification:
- Enables the investors to invest in more than one class of investment within the same account.
Nomination and Transfer:
- Reduces the time taken in passing securities to nominees or other accounts.
How a Demat Account Works – An Illustrated Example
For this let us assume the investor would like to buy 50 shares of a company that is listed on the stock exchange. Here’s how their Demat account will come into play:
Purchase:
- Buy orders which involve issues of security are placed through the trading account maintained by the investor. Once, the purchased shares are received, it is credited to the Demat account of the client/sharer.
Holding:
- The shares are held electronically therefore no share certificate needed to be kept and secured.
Dividend Receipt:
- The amount if any declared through right interface is credited to the linked bank account of the investor and the Demat account is updated with the transaction.
Sale:
- When the investor wants to dispose of these shares, they do it through the trading account, and the shares leave the Demat account.
Drawbacks of a Demat Account
Maintenance Charges:
- If you hold little balance in your account there are annual maintenance fees which can be a little costly.
Complexity for Beginners:
- One of the issues that bog new investors is explaining various methods of linking accounts and the mechanisms of fees.
Fraud Risk:
- Despite the fact that accounts established are secure, they are also vulnerable to cyber fraud otherwise.
Inactive Account Charges:
- Dormant accounts are accounts that may be charged with penalty or fees, other than commissions, even when the accounts are not frequently trading.
Regulatory Changes:
- They believe this because they opine those fluctuations in the rules of the game may affect how a Demat account is managed or utilized.
Conclusion
Every modern investor needs a Demat account to ensure the advantage of convenience and safety, as well as its efficiency. Despite these costs and thus limitations, the advantages surpass the disadvantages, particularly to those who are employing the financial markets fairly frequently.
Frequently Asked Questions
1.How does my trading account get linked to a Demat account?
Trading account is to buy and sell whereas Demat account is one that stores and safe keeps shares. Both are connected through the DP to make the transaction to happen smoothly.
2. You might wonder that what does a Power of Attorney or PoA means to the Demat account ?
A PoA is usually expected by the DP during the sale of shares and it authorizes the automatic debit of the same.
3. Can a minor open a Demat account?
Yes, persons in the minor category are allowed, but a minor cannot directly manage the Demat account on his own and the account must be managed by a guardian until he comes of age.
4. What can I do with MY securities if the DP concerned has closed shop?
Your securities continue to be deposited at the depository (NSDL or CDSL). In addition, you can transfer your holdings to another DP.
5. Is there any cost involved in transferring of shares from one Demat account to another?
Indeed, some DPs may require a small cost for share transfers whereas some may provide for free.
6. How is a Demat account closed?
To close a Demat account, you need to fill a closure request form, check whether you have any stocks on your account, and pay all the remaining amount if there is any.