What is a Demat Account? Types, Opening Process, & Benefits
In the world of modern finance, you have often heard of the “demat account”, but what exactly is it and why is it so essential? Whether you’re a seasoned investor or just starting to dip your toes into the world of finance, understanding Demat accounts is important. So, before moving on, I want you to understand the term demat. Demat stands for “dematerialized”, which means turning physical documents into digital form.
A Demat account, also known as a “Dematerialized Account”, is like a digital wallet for your investments. Instead of carrying paper documents for your stocks, bonds, and other financial assets, you keep them electronically in this account. This account plays a pivotal role in the modern world of investing and trading, making it easier for individuals to participate in the stock market and manage their investments.
What is a Demat Account?
In the past, when people invested in the stock market, they received physical share certificates as proof of ownership. These paper certificates had to be stored securely and transferred physically when buying or selling shares. This process was cumbersome, time-consuming, and prone to various risks, such as theft, loss, and fraud.
A Demat account, introduced in India in the late 1990s, revolutionized the way shares and other financial securities are held. However, with the introduction of dematerialization, the Securities and Exchange Board of India (SEBI) mandated the use of demat accounts to facilitate the electronic holding and transfer of securities.
It converts physical securities into electronic or digital form, removing the need for physical share certificates. It acts as a digital repository, much like a bank account for your financial securities. It is an essential financial tool for anyone looking to invest in the stock market, as it simplifies the process of buying, selling, and transferring shares and other financial instruments. In simpler terms, it is a secure digital wallet for your stocks, bonds, mutual funds, and other securities.
Here are some important characteristics of demat accounts:
Electronic Holding: It allows you to hold various types of securities electronically, such as shares, bonds, debentures, mutual funds, government securities, and exchange-traded funds (ETFs). The account eliminates the need for physical certificates, making transactions more convenient and secure.
Depository Participants (DPs): Demat accounts are offered by authorized institutions called Depository Participants (DPs). DPs can be banks, financial institutions, or stockbrokers registered with the two depositories in India: National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). DPs act as intermediaries between investors and the depositories.
Unique Account Number: Each Demat account is assigned a unique account number and client ID. These identifiers are used for transactions, tracking holdings, and accessing account-related information.
Online Access: Most DPs provide online access, allowing investors to view their holdings, transaction history, and statements. Online access also enables investors to buy or sell securities electronically through stock exchanges.
Safekeeping of Securities: It ensures the safekeeping of securities, reducing the risk of loss, theft, or damage associated with physical certificates. The securities held in a Demat account are held in electronic form with the depository, and ownership is recorded electronically.
Transfer of Securities: Transferring securities from one Demat account to another is a straightforward process. It involves initiating a transfer request through the DP and providing the necessary details of the recipient account.
Charges: DPs levy various charges for opening and maintaining the account, including account opening fees, annual maintenance charges, transaction fees, and other necessary charges. The fee structure may vary among DPs.
Accessibility Across Geographies: These accounts are not restricted to a specific location or region. Investors can access their accounts from anywhere, which is particularly convenient for individuals who need to manage their investments while traveling or residing abroad.
Types of Demat Accounts
The stock market is a popular way for people to invest their money and grow their wealth. There are various types of demat accounts available to cater to different needs. Here, we will explore the different types of demat accounts in India to help you better understand which one suits your needs.
Regular Demat Account: This is the most common type used by individual investors. It allows you to hold and trade a wide range of financial instruments like stocks, bonds, and mutual fund units. Anyone can open a regular Demat account, whether you are an individual, a joint holder, or even a minor (with a guardian). It provides the flexibility to trade in both equity and debt securities.
Repatriable Demat Account: It is suitable for non-resident Indians (NRIs) who want to invest in the Indian stock market. This type of account allows NRIs to transfer the money they earn from their Indian investments back to their foreign bank accounts. This flexibility is vital for NRIs who want to manage their Indian investments efficiently.
Non-Repatriable Demat Account; This account is also for NRIs but differs in one key aspect. In this type of account, NRIs cannot transfer the funds they earn in India to their foreign accounts. It is ideal for NRIs who wish to keep their earnings in India for investment purposes.
Beneficiary Owner (BO) Account: Beneficiary Owner (BO) accounts are used for trading on behalf of someone else. It can be in the name of a company, a partnership firm, or an individual. This account is essential when shares are held on behalf of someone else and the registered owner has given trading rights to another party.
Minor Demat Account: It is specially designed for minors who want to invest in the stock market. A minor can have a Demat account, but it must be linked to the parent or guardian’s account. The parent or guardian manages and operates the account on behalf of the minor. Once the minor reaches the age of 18, the account can be converted into a regular Demat account.
Joint Demat Account: It allows two or more individuals to open a single Demat account together. This can be useful for family members or business partners who want to manage their investments jointly. In this type of account, all account holders have equal rights and responsibilities.
Corporate Demat Account: This account is intended for companies and businesses. It is used to hold and manage the company’s securities. This account helps businesses efficiently manage their investments and maintain transparency in their shareholdings.
How to Open a Demat Account
You can open a Demat account by following these steps:
Choose a Depository Participant (DP): A DP is an intermediary institution that holds your securities in electronic or dematerialized form. There are several registered DPs, including banks, financial institutions, and stockbrokers. Research and choose a DP that meets your requirements.
Complete the account opening form: Visit the chosen DP’s website or their branch office to obtain the demat account opening form. Fill in the required details correctly and clearly. You may need to provide personal information, contact details, a PAN card number, bank account details, and other supporting documents.
Gather the necessary documents: Along with the account opening form, you will need to submit the following documents:
- Proof of identity (PAN card, Aadhaar card, voter ID, passport, etc.)
- Proof of address (Aadhaar card, voter ID, passport, utility bill, bank statement, etc.)
- Passport-sized photographs
- Income proof (optional, depending on the DP’s requirements)
Ensure you have the original documents along with photocopies for verification.
Submit the application: Visit the DP’s branch office with the completed application form and required documents. The DP will verify the information provided, check the documents, and may ask for any additional details if necessary.
In-person verification (IPV): Some DPs require an IPV process where you will be required to be physically present at their office or authorized centers. During IPV, your photograph will be taken, and your identity and documents will be verified.
Sign agreements and pay fees: Once the application is processed and verified, you will be required to sign the necessary agreements, terms, and conditions provided by the DP. Additionally, you may need to pay account opening fees, annual maintenance charges (AMC), and other applicable charges. The fee structure varies depending on the DP.
Receive your account details: After completing the formalities and payment, you will receive your demat account details, including the account number and client ID. These details are necessary for future transactions and accessing your account online.
Link your Demat account to a trading account: If you want to trade in stocks, you must link your Demat account with a trading account. This can be done with the same DP or a separate stockbroker.
Remember to read and understand the terms and conditions, charges, and policies associated with the demat account before proceeding. It’s advisable to compare different DPs and choose one that offers the features and services that align with your investment needs.
Benefits of a Demat Account
A demat account offers several benefits to investors. Here are some of the main benefits:
Safe and Secure: Holding securities in a Demat account eliminates the risks associated with physical certificates, such as loss, theft, forgery, or damage. The electronic form ensures the safekeeping of securities and reduces the chances of fraud.
Easy and Convenient Transactions: With a Demat account, buying, selling, and transferring securities becomes convenient and hassle-free. Investors can trade securities online through stock exchanges or place orders through their registered brokers. This enables the quick execution of trades and reduces paperwork.
Dematerialization and Rematerialization: It allows for the dematerialization of physical securities, converting them into electronic form. This process simplifies the holding and trading of securities. If an investor wants to convert electronic holdings back into physical certificates, rematerialization is possible.
Single Account for Various Securities: It enables the holding of multiple types of securities, including shares, bonds, debentures, mutual funds, ETFs, government securities, and more. Instead of maintaining separate physical certificates for each security, all holdings can be consolidated in one Demat account.
Faster Settlement: Trading in electronic form speeds up the settlement process. In our country, trades executed on the stock exchanges are settled in T+2 days (trade day plus two working days) for most securities. The electronic transfer of securities from the seller’s Demat account to the buyer’s account streamlines the settlement process.
Reduced Paperwork and Documentation: It reduces the need for physical paperwork associated with handling and transferring securities. Investors are not required to submit physical share transfer forms, transfer deeds, or other documents typically needed for physical securities.
Corporate Actions and Benefits: It simplifies the handling of corporate actions, such as dividends, bonuses, rights issues, or stock splits. Investors holding securities in electronic form receive such benefits directly into their Demat accounts without the need for physical correspondence.
Loan against Securities: With this account, investors can avail themselves of loans against their securities. Certain financial institutions offer loans where securities held in the Demat account serve as collateral, providing liquidity without the need to sell the securities.
Online Access and Portfolio Tracking: Most DPs provide online access to Demat accounts, allowing investors to view their holdings, transaction history, and account statements. Investors can easily track their portfolio performance, view real-time prices, and access other relevant information.
Things to Take into Account Before Opening a Demat Account
Before opening a Demat account, there are certain important factors you should consider and be aware of. The following are some important things that you should be aware of:
Choose a Reliable Depository Participant (DP): Research and select a reputable DP for opening your Demat account. Consider factors like the DP’s reputation, service quality, customer support, charges, online platform features, and the range of services they offer.
Charges and Fees: Understand the fee structure associated with the Demat account. DPs may charge account opening fees, annual maintenance charges (AMC), transaction fees, custodian fees, and other charges. Be aware of these charges and compare them among different DPs to choose the most cost-effective option.
Minimum Balance Requirement: Some DPs may require a minimum balance to be maintained in the account. Make sure you understand the minimum balance requirement and check if it aligns with your investment needs.
Additional Services and Features: Consider the additional services and features offered by the DP. This may include online access to the Demat account, research reports, investment advisory services, ease of transaction initiation, mobile app availability, and value-added services like loans against securities or IPO application facilities.
Customer Support: Evaluate the quality and responsiveness of customer support provided by the DP. It’s crucial to have access to prompt assistance and support in case of any queries, issues, or concerns related to your account.
Account Linkage: If you plan to trade in securities, check whether the DP offers the facility to link your Demat account with a trading account. Having a linked trading account can streamline the process of buying and selling securities.
Demat Account Transfer: In case you wish to switch from one DP to another in the future, understand the process and charges involved in transferring your Demat account. Ensure that the DP you choose has a smooth and efficient transfer process.
Nomination Facility: Check if the DP provides a nomination facility for your account. This allows you to nominate a person who can receive the securities held in your Demat account in case of your demise.
Research and Reviews: Before finalizing a DP, conduct thorough research and read reviews about their services. Look for feedback from existing customers to get an idea of their experiences with the DP.
Compliance and Regulations: Familiarize yourself with the rules, regulations, and guidelines set by the depositories and regulatory authorities like SEBI. Understanding the compliance requirements ensures that you operate within the legal framework.
How Does a Demat Account Work?
A Demat account works as a digital repository to hold and manage securities in an electronic format. Here’s a breakdown of how a Demat account works:
Account Opening: To open a Demat account, you need to select a Depository Participant, which is registered with the depositories NSDL or CDSL. You will need to complete an account opening form, provide the required documents, and pay the applicable fees.
Account Number and Client ID: Once your account is opened, you will be assigned a unique Demat account number and a client ID. These identifiers are used for all future transactions and communications related to your account.
Holding Securities: You can hold various types of securities in your account, including shares, bonds, debentures, mutual funds, government securities, and exchange-traded funds (ETFs). Securities held in a Demat account are in electronic form, eliminating the need for physical certificates.
Buying Securities: To buy securities, you can place orders through your linked trading account or directly through your DP’s online platform. When you place a buy order, the securities are credited to your account once the transaction is executed and settled.
Selling Securities: When you sell securities, you need to place a sell order through your linked trading account or your DP’s online platform. Once the sell order is executed, the securities are debited from your Demat account, and the corresponding funds are credited to your linked bank account.
Settlement: The settlement process involves the exchange of securities and funds between the buyer and the seller. In our country, most settlements happen on a T+2 basis, which means the securities are delivered and funds are paid two working days after the trade execution. The securities are electronically transferred from the seller’s to the buyer’s Demat account, and the funds are transferred between their respective bank accounts.
Corporate Actions: Demat accounts simplify the handling of corporate actions such as dividends, bonuses, rights issues, or stock splits. When a corporate action is announced by a company, the respective benefits or entitlements are directly credited to the accounts of eligible shareholders.
Portfolio Statement: DPs provide periodic statements or online access to view your account holdings and transaction history. These statements reflect the securities held in your account, their quantities, and any recent transactions.
Nomination Facility: Most DPs offer a nomination facility for Demat accounts. This allows you to nominate a person who will receive the securities held in your Demat account in the event of your demise.
It’s important to note that the functioning of a demat account is regulated by SEBI and governed by the rules and regulations set by the depositories. The account holder should comply with the prescribed guidelines and fulfill any regulatory requirements.
What are the different types of charges associated with opening a Demat account?
Opening a Demat account in our country involves certain charges and fees. Here are the types of charges commonly associated with opening and maintaining it:
Account Opening Fee: This is a one-time fee that the Depository Participant (DP) charges for opening a Demat account for the first time. The amount may vary among DPs and can range from a nominal fee to higher charges, depending on the DP’s policies.
Annual Maintenance Charges (AMC): AMC is an annual fee charged by the DP for maintaining the Demat account. It covers the costs associated with account maintenance, record-keeping, and providing services related to the account. AMC is usually payable upfront or at regular intervals, such as quarterly, half-yearly, or annually. The AMC amount varies among DPs and can depend on factors like the type of account (individual or corporate) and the number of holdings in the account.
Transaction Charges: DPs may charge transaction fees for various transactions made through the Demat account. These charges can include fees for buying or selling securities, transferring securities between accounts, pledging or unpledging securities, and other related transactions. Transaction charges can be based on a flat fee or a percentage of the transaction value, depending on the DP’s fee structure.
Custodian Fees: In certain cases, custodian fees may be applicable for specific types of securities. For example, if you hold foreign securities in your Demat account, the DP may charge custodian fees for safekeeping and managing those securities.
Dematerialization and Rematerialization Charges: Dematerialization refers to the process of converting physical share certificates into electronic form, while rematerialization is the process of converting electronic holdings back into physical certificates. DPs may levy charges for dematerialization and rematerialization requests, which can vary based on the number of certificates or the value of securities being dematerialized or rematerialized.
SMS and Email Alert Charges: Some DPs provide optional SMS and email alerts for specific transactions or activities in the Demat account. If you opt for these services, there may be charges associated with receiving such alerts.
Other Charges: DPs may have additional charges for value-added services like availing loans against securities, availing initial public offerings (IPOs) through the Demat account, availing research reports, or other customized services. These charges vary among DPs and are typically optional.
India’s Top Demat Account Service Providers
There are several reputable Demat account service providers in our country. The best service provider for you will depend on your specific requirements and preferences. Here are some of the well-known and popular Demat account service providers in India:
- Zerodha: Zerodha is one of the largest retail stockbrokers in India and offers a user-friendly online platform for trading and investing. They are known for their low brokerage fees and technologically advanced trading tools. Zerodha provides Demat accounts through their in-house depository services.
- ICICI Direct: ICICI Direct is a well-established brokerage and financial services provider in India. They offer a range of investment options and have a robust online platform. ICICI Direct provides demat accounts with seamless integration into their trading platform.
- HDFC Securities: HDFC Securities, a subsidiary of HDFC Bank, is a popular choice for demat accounts. They offer a comprehensive range of investment options and have a user-friendly trading platform. HDFC Securities provides a seamless integration of Demat accounts with their trading services.
- Sharekhan: Sharekhan is a well-known brokerage firm in India offering a wide range of investment services. They provide Demat accounts with easy accessibility and advanced trading tools. Sharekhan is well-known for its comprehensive research and advisory services.
- Axis Direct: Axis Direct, a subsidiary of Axis Bank, is a reputed brokerage firm offering a range of investment and trading services. They provide seamless integration of Demat accounts with their trading platform and have a user-friendly interface.
- Kotak Securities: Kotak Securities is a part of Kotak Mahindra Bank and offers a range of investment and trading services. They provide Demat accounts with a seamless trading experience through their online platform.
- Angel Broking: Angel Broking is a well-known brokerage firm in India offering a range of investment and trading services. They provide Demat accounts with a user-friendly trading platform and have a strong research and advisory team.
It’s important to evaluate the services, features, brokerage charges, customer support, and overall reputation of the Demat account service providers. Consider your investment needs, trading preferences, and the level of customer service you expect before selecting the best service provider for you.
In conclusion, a demat account is a crucial financial tool that has revolutionized the way individuals and investors manage their securities and investments. This electronic account eliminates the need for physical share certificates, providing a secure and convenient means of holding and trading their financial instruments. It offers transparency, reduces the risk of theft or damage to physical certificates, and enables easy and swift transactions. Additionally, it facilitates online tracking of investments and simplifies the process of buying and selling securities. It has become an indispensable part of the modern financial landscape, empowering investors with greater control and efficiency in their financial portfolios.