A Demat account, also known as a dematerialized account popularly, is a form of the account used to hold, trade, and transact shares and securities in electronic form. When trading in stocks and securities online, shares and securities are purchased and kept in a Demat account, thereby facilitating easy trade. A Demat account can hold all forms of securities investments such as shares, exchange -funds, bonds, government securities, and mutual funds in one single place.
How Does a Demat Account Work?
Before undertaking an exercise of Demat account opening, one needs to know how a Demat account work.
- NSDL and CSDL, the depositories in India, hold all demat accounts in India. The Central depository holds individual account shareholding details.
- Demat accounts act as a storage unit for shares, shock, securities, and financial products bought and sold on exchanges. The demat accounts store these securities from purchase until the said stock or security is sold.
- Each demat account has its own unique identification number or the UIN, which is required to be provided for all transactions.
- The Depository Participants or the DPs provide individual demat accounts access CDSL and NSDL. Usually, brokers or banks act as DP and serve as links between individual investors and the central depository.
- A demat account holds an investor’s portfolio and automatically updates the portfolio post any form of transaction.
How to Open a Demat Account?
Opening a Demat Account is a simple process. Many banks, brokerage firms, and financial institutions also provide an option to investors, individuals, and new account holders to open a Demat account online.
Anyone can open a demat account by just following a few steps mentioned below.
1. Selecting a Depository Participant
The investor is required to select a depository participant with whom they wish to open a demat account with. The depository participant usually is brokerage firms, financial institutions, and banks who work as a bridge between the investors and the stock exchanges. The website of NSDL and CDSL have a list of all depository participants posted on their website.
2. Filling and Submitting all the required Documentation
The investor must fill an account opening form and submit their KYC details and the account opening form. The investor needs to provide their identity proof and address proof documents.
For Proof of identity, the account opening can submit any one of the following documents along with a PAN card.
- Aadhar Card
- Voter Identification
- Driving License
- Photo-identity issued by any public sector undertaking, any statutory or regulatory body, state or central government institution, public financial institution, scheduled commercial banks, etc.
For Proof of Address, the account opener can submit any one of the following documents.
- Driving License
- Aadhar Card.
- Registered Leased Agreement
- Bank account statement and/or passbook, which are not less than 3 months old.
- Electricity, Telephone or Gas bills which are not less than 3 months old.
- Photo-identity mentioning residential address issued by any public sector undertaking, any statutory or regulatory body, state or central government institution, public financial institution, scheduled commercial banks, etc.
1. Executing an Agreement/Contract.
After selecting a depository participant and filling in all the paperwork, the investor must sign an agreement or a contract with the depository participant. The agreement or the contract provides details and information to the investor regarding their rights and duties, responsibilities of the depository participant, schedule of charges related to various fees associated with opening, maintaining, and operating a demat account.
An investor needs to read the agreement properly before signing it.
2. The opening of Demat Account and obtaining Demat account number
After completion of all the formalities and processing of your application, your Depository Participant opens a demat account and provides the customer with a demat account number, a Beneficial Owner Identification Number (BO ID).
Now the account holder can start buying, selling, and storing/holding their stocks, shares, and securities in their demat account.
3. Open a Demat account online.
Now, many banks and broking firms allow investors and individuals to open Demat accounts online. Users need to log on to the Depository Participant website, which may be a financial institution, bank, or a broking firm. The individual needs to click on the apply open Demat account online, fill in an application form, upload their KYC documents, sign an online agreement, and start using their demat account in a matter of hours.
Why do Investors Need to Open a Demat Account
On June 8, 2018, SEBI issued a notification stating its intent of 100% dematerialization of shares. As per the said SEBI notification, all share certificates held in physical form will be deemed a worthless piece of paper if they are not converted into dematerialized form. Further share certificates held in physical form will not be allowed to be transferred, traded, or exchanged after 5th December unless the said stock and shares are converted into demat form. The share certificates held under the will upon a shareholder’s death are exempt from this notification.
Advantages of using a Demat Account
- Safe, Secure, and Easy Holding of Shares.
Demat accounts hold all shares and securities bought from stock exchanges in electronic format in a single account, unlike previously when people had to sort, file, and securely store original share certificates to prevent any form of loss, theft, or damage. Holders of physical share certificates can open a Demat account online, convert the shares into dematerialized form and safely hold their shares, securities, and stocks.
- Ease in transferability of Shares
Shares can be immediately transferred in the buyer’s name almost immediately the shares credited in the buyer’s demand account. Previously, when shares were held in physical forms as share certificates, original share certificates had to be sent to the registrar or the company to get transferred in an individual’s name. This process was used to take weeks and even months. Also, there was a risk of losing share certificates during this process, eliminated by demat accounts.
Shareholders holding physical share certificates can open a Demat account online and quickly transfer their shares in a matter of seconds.
- Shares can be easily divided.
Holders of physical share certificates can open a Demat account online and buy, sell, and trade-in shares in any number they desire. Previously, when stocks were held in physical form as share certificates, investors were forced to buy, sell and trade shares in marketable lots of 50, 100, 200 shares, which made buying or selling shares in an odd quantity, like say buying 24 shares a challenging task for investors. Demat accounts have solved this issue by enabling investors to buy and sell shares in any number of shares they desire. Now investors can buy, sell or trade shares and securities in any divisible number as desired by an investor and is not restricted to lot size, i.e., now investors can transact even in a single share.
- No Stamp Duty Required on Transfer of Securities
Earlier, while physically transferring shares, stamp duty or share transfer stamps had to be posted below the share certificate. With the introduction of demat accounts, this has been replaced by the security transaction tax, wherein the entire process of visiting the stock exchange to purchase share transfer stamps has been eliminated.
- Open Demat account online.
During the initial days of dematerialization, many investors were discouraged from opening demat accounts and converting their physical share certificates into dematerialized forms due to the various fees associated with opening, maintaining, and operating a demat account. But today, many banks, brokerage firms, and financial institutions offer individuals and investors to open Demat accounts online. Many DPs also offer individuals open demat accounts for free and relaxation on various charges associated with opening, maintaining, and operating a demat account.