- Date : 26/12/2020
- Read: 7 mins
Here’s everything you need to know before opening a demat account.
Warren Buffett once rightly said, “If you don't find a way to make money while you sleep, you will work until you die.” This legendary investor is known for his emphasis on investments and passive income, a strategy that has made him one of the wealthiest people in the world.
It’s not just him; the stock market and other financial investments have created wealth for many investors. If you too want to create a secondary source of income, you would have to open a demat account. That is the first step towards financial freedom.
India has around 4 crore demat accounts today, but only 25% of them are active. Obviously, several demat accounts have been opened by individuals who aren’t using them anymore. So, before you take the plunge, it would be a good idea to understand what it’s all about.
1. What is a demat account? And what does it do?
A demat – or dematerialised – account is just like a bank account, except it stores all your paper assets (such as stocks, bonds, debentures, mutual funds, and exchange-traded funds) rather than your money online. Earlier, a trader or investor had to hold real paper securities, such as a stock or a bond certificate, that certified them as the owner of the asset. Naturally, this was not the most effective method as they had to protect the document from getting destroyed – either by intent or by accident.
However, with the advent of the internet, this process is now easy, cheap, and straightforward. Today, you can access all your financial assets online through your demat account.
2. How is a demat account different from a trading account?
As mentioned earlier, a demat account enables you to hold your shares in an electronic format. However, a trading account enables you to trade in the stock market, allowing you to buy and sell securities using a trading account. A trading account links your demat account and bank account.
When you buy a share using a trading account, money gets debited from your bank account and the share gets credited into your demat account. Conversely, when you sell a share using a trading account, money earned from that transaction gets credited into your bank account and the share gets debited from your demat account.
A trading account can be opened and activated through a broker. To trade in the stock market, you need both a demat as well as a trading account.
3. How can one open a demat account?
You can open a demat account with a SEBI-registered depository participant. A depository participant is usually a stockbroker that acts as a link between the investor and the depository. In India, NSDL (National Securities Depository Ltd) and CDSL (Central Depository Services Ltd) are the leading depositories that maintain stocks, bonds, and shares in electronic format. A depository participant (in this case, the broker) is the intermediary between you, the depository, and the markets.
4. How does one choose a broker?
It is highly recommended that you open a demat account with a broker as it makes things seamless and convenient. Brokers can provide you with a platform through which you can buy and sell your securities and settle your transactions with the exchanges.
Presently there are three types of stock brokers: bank-based brokers, full-service brokers, and discount brokers. Bank-based brokers tend to be the most expensive ones to work with, so traders prefer working with full-service or discount brokers.
Full-service brokers provide services like research reports, stock advisory services etc. along with a relationship manager, but charge higher fees than discount brokers. If you are a long-term investor who prefers value-added services, you might go for this option.
Discount brokers offer high functioning trading platforms and charge low brokerages. They have become very popular among traders thanks to their value proposition. However, if you are a beginner, you might be at a disadvantage as there’s no agent to explain things to you. Hence, it would be ideal to compare brokers and choose one that would best suit you.
How can one apply for a new demat account?
After selecting the broker, you need to visit their office or official website and apply for a demat account. Nowadays, you can apply for your account electronically and even complete your KYC online. It generally takes 2-3 days to get your account fully activated.
5. What are the requirements for opening a demat account?
Similar to the process of opening a bank account, you will need to give some documents for verification. While filling out a registration form, keep the following documents handy:
- PAN card
- ID proof (driving licence/voter card/Aadhaar card)
- Address proof (passport/ration card/driving licence)
- Bank statement (usually for the last six months)
You will also be charged deposit fees, which would include account opening charges and annual maintenance fees as well as margin balance.
Unless you are planning to trade only in intraday or derivatives segment, you will have to sign a POA (Power of Attorney) document. A POA would be required if you wish to sell or pledge shares from your demat account.
6. Are there any advantages of opening a demat account?
The demat account has introduced a paperless element in the world of financial assets and has made storing of assets easier and more cost-friendly. It also provides other benefits:
- Auto-update feature: A demat account stores all records of your transactions automatically, which means you don’t need to update it every time you make a transaction.
- One entity, one account: No matter the number of bank accounts or trading accounts you use to make your investments, your demat account will store and keep track of all the details in a common account.
- Lower cost and safety: Fees for trading and storing are reduced as paper maintenance is a thing of the past. It is much less cumbersome to maintain share certificates electronically. You are also safe from any theft, damage, or fraud with your demat account.
7. What are the general charges associated with a demat account?
It's better to understand the charges beforehand, so here are the significant charges incurred while opening and operating a demat account:
- Annual maintenance charge (AMC): An AMC Is levied by brokers to maintain your account's functionality and provide you with seamless service on demand. The fees can vary widely across brokers and different types of AMC schemes. Usually, you may not be charged for a basic demat account which has a balance upto Rs 50,000. Otherwise, the AMC could vary between Rs 300 per annum and Rs 1000 per annum depending on the broker.
- Account opening charges: This is a one-time charge that you would be asked to pay for opening a demat account. This fee could differ between institutions. It also depends on the structure, overhead costs, and the services provided by the brokerages. For example, a discount brokerage may charge only Rs 100 as an account opening fee.
- Transaction fee: A brokerage firm would levy a charge on each transaction. This charge is one of the ways brokerages earn money. It is likely to be the most significant charge that you are required to regularly pay the brokerage house, and it can vary based on the value of your transaction or the number of stocks.
- Other charges: This includes custodian fee and dematerialisation fees, which are charged by the depository and the broker combined, for converting the shares into electronic mode from physical share certificates.
Dematerialisation has made things easy, transparent, and cost-effective for an investor. Open a demat account today and begin your journey to create wealth! 5 Reasons why people are shifting to stock trading amid COVID-19
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.