What is Demat Account? How Demat account works?

Do you know what is the most basic requirement for trading in share market? You must have a bank account, in the same way a demat account is required to trade in the stock market.

Demat account is similar to your bank account. The only difference is that in a bank account you keep your capital in digital format, in the same way you deposit shares in a digital format in a demat account.

It is mandatory to have a demat account to trade in the stock market. So you have to get complete information about Demat Account.

Let us then do a complete review of Demat Account.

Demat account was not used when trading was started in the stock market. Back then, brokers used to offer shares to the trader in physical form. Physical share means paper/document.

Due to the lack of technology, this trend remained in the market for a long time. But gradually, frauds and scams started happening with the shares in the stock market.

Also, due to the physical file of the share, there was a risk of bursting or theft.

After looking at all these reasons, the exercise of keeping the stock in digital form started. The process of holding shares in digital format is called dematerialisation. Dematerialization is called Demat in short form.

Digital trading started with the introduction of Demat account and it became more secure to hold shares.

Now you have understood the need and requirement of Demat. Let us further try to understand about Demat account.

What is Demat Account?

What is Demat Account? How does it work and is the account opening process? This is very important to know for the new investor who wants to trade in the stock market.

Demat account is basically an electronic account, where all your shares are stored in a dematerialized format. Dematerialized format means holding of shares in digital form.

Therefore the investor or trader should review the stock market before trading.

A demat account is like your bank account.

For example, you deposit your money in a non-physical or electronic form in a savings or existing account of a bank.

Similarly, the shares you buy from the stock market get credited to your demat account in an electronic format.

There are some basics related to demat account that you should be aware of. Some of them are listed below:

A demat account will be linked to your PAN card.

You can open any number of demat accounts with different stockbrokers. However, it has advantages and disadvantages depending on your trading style.

A unique ID number will be linked to your demat account, which basically differentiates you from other investors in the stock market.

Not every stockbroker has the provision to open a demat account directly. At the backend, such shareholders have partnerships with other depository participants who actually open your demat accounts.

Shares can be transferred from one demat account to another.

There is no need to open your Demat account with minimum number of shares or maintain minimum shares balance in your account.

Purpose of Demat Account

The objectives of Demat account are very simple. Here are listed below:

All the shares in these accounts are held in electronic or dematerialized form.

An investor can not only hold shares but can also hold mutual funds, ETFs, government bonds, securities.

The shares being credited in the account are protected and kept away from risks such as theft, loss or damage.

Provides an easy online mechanism to view, transfer, sell or buy various investment products through a single account.

A lot has been explained about the purpose and reasons for opening a demat account.

In the rest of this article, we will talk about the process, documentation, advantages and disadvantages related to demat account.

Demat Account Meaning in detail

As discussed earlier, a demat account is an account that holds your shares in electronic form.

Once you buy shares, you can request for the dematerialization process, ie converting your physical shares into electronic form.

Thus, when you place a buy trade on the exchange, in exchange for the monetary amount paid by you, you get the shares credited to your account in an electronic form.

Once you sell these shares, the number of shares deposited from the same account gets deducted.

Apart from stocks, you can deposit other investment products like ETFs (Exchange Traded Funds), Mutual Funds, Government Securities, Bonds, etc.

Different stockbrokers charge different demat account charges as well as demat account maintenance charges. Where the account opening fee is a one-time payment, the Annual Maintenance Fee (AMC) has to be paid every year.

These demat accounts are basically provided through two regulated depositories CDSL or NSDL.

Various stockbrokers or depository participants have membership with one or both of the above mentioned depositories.

In order to find a stockbroker to open a demat account, the following are some important points that you should consider:

If you are a beginning investor, you need to keep an eye on several things before deciding to open an account with a particular stockbroker.

Understand the type of broker – is it a full-service stock-broker, a bank based stockbroker or a discount stockbroker.

You should check all types of charges levied on your account. This account opening charges, AMC, brokerage, minimum initial deposit etc.

Range of trading classes offered including IPO, Equity, Commodity trading, Currency trading etc. However, this preference varies from trader to trader.

Advantages of Demat Account

As mentioned above, the demat account is completely online in nature and removes many of your investment hassles in the stock market. Here are some of the top benefits of opening a demat account:

Your life becomes easier when the shares you buy are held in an electronic format.

Securities can be transferred easily.

It is easy to maintain your securities, bonds, ETFs in dematerialized form.

There is no paperwork involved in holding, buying or selling these shares. There is no need for stamp duty along with savings in transaction charges for transfer of demat account securities.

Odd lot problem is solved through demat account now you can buy or sell even 1 share.

There is no risk of theft or any wrongdoing in your shares in the demat account.

The transfer facility is very handy after the death of an original account holder.

Closing a demat account is relatively easy.

Disadvantages of Demat Account

It is important to look at the whole picture, here are some of the concerns that you may face (and probably haven't understood yet) while using a demat account:

You can open a bank account without a PAN card, but a demat account requires a PAN card.

You should be able to make the best use of the trading platform on a mobile phone or laptop/desktop.

Placement of an order through call and trade facility takes time which results in reduction of final profit.

Investors and traders should understand the specific terms and conditions laid down by the broker and do not blindly sign anything that is asked of them.

Some stockbrokers always find loopholes in the system and use that to their advantage against their clients. So always trade with a leading or recommended stockbroker.

Demat account charges

You have to pay a fee to the stockbroker for opening and maintaining a demat account. These fees are of different types, including:

• Account opening fee
• Annual maintenance fee
• Brokerage fee
• DP fee
• Tax
• Transaction fee

and many more.

So whenever you choose a broker to open a demat account, always be sure to know about all the charges, otherwise you may suffer losses.