A Demat account is similar to a bank account but with the difference that in this account physical money is not held. Whenever you trade any stocks or securities, these share certificates and securities are held in your Demat account in electronic form. In the old days’ shares, bonds, government securities were traded in the form or physical papers. But now everything is transformed in electronic form. The Demat account holds your investments like shares, bonds, government securities, Mutual Funds, Insurance and ETFs in electronic form and eliminates the hassles of handling and maintenance of physical papers.
Why Do You Need a Demat Account?
As we have discussed above, the Demat account stores all your transactions like shares, bonds, government securities, Mutual Funds, Insurance and ETFs in electronic form. The Securities and Exchange Board of India (SEBI) has made it mandatory to have Demat account for everyone, who wants to trade Indian securities. A person without a Demat account is not allowed to trade securities in India.
Besides being regulatory compliance, the Demat account offers many useful features and advantages for the investors. Some of these features are listed as below:
Offers a Safe Wallet
Demat accounts provide a safe wallet for storage of your shares, bonds, mutual funds, etc. The risk of misplacing physical certificates, theft or fraudulent exchanges of stock and bond holdings is eliminated in case of Demat accounts, since Demat account stores securities in electronic form. The risk of fake signatures on physical documents is also eliminated in case of Demat accounts.
No Extra Stamp Duty Charges
The additional cost of stamp duty charges on transfer of shares is not incurred in case of Demat accounts, which were the case with physical certificates.
Immediate Transaction
Demat account enables immediate transaction of securities. The Demat accounts also enable investors to convert their physical share certificates into digital form and also convert their online securities into physical documents smoothly.
Updated Market Information
If you have a Demat account, then you automatically have access to updated market information such as live price charts and investment comparison tools. This information is very useful for investors in making informed investment decisions.
No Minimum Balance Fees
Demat account do not require any minimum balance fee or minimum number of trades. These conditions are suitable for investors who trade occasionally. Investors can also freeze the demat account for certain periods of time if they don’t want to trade for a time being.
Multiple Access Points
As the demat accounts are completely digital, these can be accessed from anywhere using the internet.
Loan Collateral
The securities hold in your demat account can be pledged to financial institutions to secure loan from them.
How to Open a Demat Account?
Demat account is opened at a central depository such as the National Securities Depository Limited (NSDL) or the Central Depository Services Limited (CDSL). These central depositories interact with the investor through depository participants (DPs). These DPs could be any financial institution or entity registered with the depository institution to act as an intermediary between the depository and the investor.
Following steps are followed to open a Demat account:
You can open the Demat account within the comfort of your home. The entire process is online. Below are the steps to be followed to open a Demat account:
Step One: Choose a Depository Participant (DP)
The first step is to select a DP with whom you want to open the Demat account.
Step 2: Submit Basic Details
After selecting the DP, go the website of the DP and fill up the account opening form.
Step 3: Finish the in-person verification (IPV)
Step 4: Get your account number/ID
Demat Account Opening Charges & Fees
Opening and maintaining Demat account incur some fee also. You should have an idea of cost involved in opening and maintaining a demat account, which is described below.
Account Opening Charges
Most of the demat account providers open your demat account with zero account opening fee, although some account providers take nominal charges for account opening.
Demat Account Custodian Fees
Most of the Demat account providers do not charge custodian fee, however some account providers charge a nominal custodian fee which depends on the number of securities that are held in a demat account.
Annual Maintenance Charges
DPs charge annual maintenance charges from the investors, which may range from ₹300 to ₹500 annually. In addition to it, the investors have to pay Central Government’s Goods and Services Tax (GST).
Transaction Charges
The investors have to pay transaction charges also which is the fee charged by the DP per transaction. These charges may be flat or a percentage per transaction. These transaction charges could range anywhere between ₹1.5 to ₹20 depending on the volume of trades carried out.
Types of Demat Accounts
Regular Demat Account: This type of demat account is used for Indian citizens who reside in the country.
Repatriable Demat Account: This kind of Demat Account is for non-resident Indians (NRIs), which enables money to be transferred abroad. This Demat Account needs to be linked to a NRE bank account.
Non-Repatriable Demat Account: This account is also for the NRIs, but it does not enable money to be transferred abroad. It also has to be linked to an NRO bank account.
Things to Take Care While Opening the Demat Account
You should take care of the following things while opening a demat account:
(a) Trust and Legacy of the broker.
(b) Technological platform provided by the broker.
(c) Demat account opening and maintenance charges.
(d) Level of customer service provided by the broker.
Conclusion
Demat account stores all your transactions like shares, bonds, government securities, Mutual Funds, Insurance and ETFs in electronic form. Demat account is mandatory for investors investing in securities. Along with mandatory requirement, it offers many advantages also. Some of the advantages are instant transaction, safe holding of shares, mutual funds, bonds, etc., updated market information, etc. You should also be aware that there are nominal opening and maintenance charges for Demat account, which may vary from one DP to another.
Also read: Know About the Charges & Processing Fee on Personal Loans
