- Date : 03/03/2020
- Read: 5 mins
Learning how to open and operate a Demat account is Investing 101, and it’s essential you know everything about it before you enter the stock exchange. So how does it work?
In India, if you want to invest in financial instruments such as shares, bonds or mutual funds or carry out any sort of transaction on the stock exchange, you need to have a Demat account.
What is Demat Account and what is the use of it?
With a Dematerialised or a Demat account, investors need not take physical possession of their security documents; instead, the financial instruments are held electronically in the Demat account with a registered depository participant.
Let’s look at 7 things you must know about a Demat account.
1. What is a depository?
A depository is an organisation that holds securities shares, debentures, bonds, government securities, mutual fund units etc. in an electronic format. A depository is very similar to a bank. Presently, two depositories -- National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) -- are registered with SEBI. NSDL works for the National Stock Exchange (NSE), whereas CDSL works for the Bombay Stock Exchange (BSE).
2. How to open Demat account?
To open a Demat account, you should approach a registered Depository Participant (DP). A DP is an institution that serves as an intermediary between the investor and the depository. Commercial banks, stockbrokers, state financial corporations among others can register as a DP with SEBI. As of 2018, 851 depository participants were registered with SEBI. You can find this list on the websites of NDSL and CDSL.
3. What are the types of Demat account?
Even though their function remains the same, there are three types of Demat accounts classified basis the domicile of the applicant.
There is the regular Demat account for all resident Indians, then there is repatriable Demat account linked to a NRE account for non-residents who wish to transfer funds abroad and thirdly there is a non-repatriable Demat account linked to a NRO account for non-residents who wish to keep their funds in India.
4. What are the documents required for Demat account?
To open a Demat account, you need to submit the following documents to your depository participant.
- Passport size photographs
- Proof of Identity (Driving licence/passport/Aadhar card/voter id)
- Proof of residence (Driving licence/passport/Aadhar card/voter id)
- Copy of your PAN card
Upon submission of an application form along with these documents, it takes 1-2 weeks to open a Demat account.
5. How does Demat account work?
A Demat account is an electronic vault that maintains a ledger entry of purchases and sales made for various investments such as stocks, mutual funds, debentures, etc. Now you can even hold your insurance policy in dematerialised form. In that sense how Demat account works is just like a bank account.
Your Demat account is linked to a trading and banking account. Every time you put in a ‘buy’ or ‘sell’ request, your DP forwards it to the stock exchange which in turn finds a buyer/ seller for your request and in turn, helps facilitate the trade. Correspondingly your Demat account is then debited or credited basis the transaction.
6. What are the features of Demat account?
- A safe and convenient method of stories high-value securities such as stocks, mutual funds and bonds
- Instant transfer of securities to the investor
- Elimination of risks related to physical transfer of documents such as delayed deliveries, fake documents, thefts, etc.
- Any bonus shares get credited automatically to the demat account without any paperwork
- No need to change address with all the companies in which you are an investor; any change of address with the DP is communicated to all the companies
- Hold all types of investments, such as stocks, bonds and mutual funds in a single account
Related: What is short-selling?
7. What will be the Demat account charges?
The charges of opening a demat account vary according to depository participants. While most DPs charge an account opening fee, certain private banks do not charge any fee for opening a demat account. Apart from account opening charges, there could be few other charges such as an annual maintenance charges (AMC), credit charges, mailing charges for statements, etc. AMC for a demat account ranges from Rs. 200 to Rs. 8502. The amount of AMC can vary by the number of transactions.
To encourage investment in the stock market, SEBI has introduced a Basic Services Demat Account that is a no-frills account with limited services. There is no Annual Maintenance Charge (AMC) for holding investments up to Rs. 50,0003 in a basic services account. For investments between Rs 50,001 and Rs 2,00,000, the AMC charges will be Rs 100.
A demat account is necessary if you want to reap the benefits of investing in the stock market. Before opening one, do a thorough research of the fees charged by various depository participant and understand the various features offered. If you’re a new investor, a Basic Services Demat Account will be adequate for you. To learn more about the different risks that you shpuld be wary about before investing in stock markets, take a look at this article.