Demat Account: Everything You Should Know About It

980 3 minutes read

India has witnessed a multi-year rise in Demat account opening domain, in the financial year 2020 alone. It is the biggest increase in the entire decade.

Even the markets (indices) have created history and touched an all-time high. With the recorded data, you can easily say, retail investors, have played a big role in this rally.

Many individuals have opened demat accounts, because of the lockdown which led to the loss of other income. People diverted their capital into the stock markets and Nifty ended up with the highest ever market capitalization.

Also, the ease of demat account opening is one reason for this boom in the demat account opening space. One of the best demat account features is that it stores all the financial instruments together in one place, too in electronic form.

If you want to do trading in the Indian stock markets, you need these three accounts: demat, trading, and a bank account. Without these three accounts, it is impossible to trade in any sort of financial instrument.

However, in the article, we will discuss the demat account in detail. Let us first begin with understanding:

Table of Contents

What is a Demat Account?

A demat account works as a storage for all types of financial instruments. These may be bonds, Government securities, equity shares, and many more. In this account, these financial instruments are stored in electronic form.

The demat accounts work as an alternative to the traditional system of circulating physical certificates of shares. Physical shares convert into electronic form and then store in demat accounts. This process is called the dematerialization of shares.

Who Handles The Demat Accounts?

Two entities are involved to maintain demat accounts. The two parties are:

Depositories
Depository Participants

Depositories

There are two major depositories in the Indian stock market. First, Central Depository Services Limited (CDSL), and second, National Services Depository Limited (NSDL).

These depositories hold the financial securities with them and match you with the buyer and the seller in the market.

Depository Participants

If you want to avail of the depository’s services, you will have to go through the Depository Participants (DP). DP is a mediator between a depository and an investor. DP provides the service of opening a demat and trading account.

Advantages of a Demat Account

The demat account is the safest place to store financial securities. Some DPs protect the demat accounts with two-factor authentication. Also, compared to the traditional method, the demat account eliminates the risk of all the frauds that were involved.

Since it is an automated and electronic platform, therefore, transparency is maintained. Investors can see the price fluctuation live as per the market.
The demat account stores all the financial instruments together in one place, too electronically. Therefore, you do not have to switch between trading platforms and demat accounts in order to track your portfolio. You can get all the financial instruments in one place.

How To Open A Demat Account?

To open a trading account is also similar to a demat account. Therefore, you can follow these steps to open both the accounts:

You need to have Proof of Identity for opening a demat account (Eg.: Pan Card, Driving Licence)

Along with Identity proof, you will also be required to have Proof of Address (Eg.; Adhaar card, voter Id).

You will also be required to show your income proof to open a demat and trading account. For income proof, you can use ITR or salary slips.

A canceled cheque or bank statement is also required for Proof of a bank account.

For opening a Demat account, you need these are the documents. We need to upload them on the brokers’ website. Post verification of the documents, you will receive login credentials to the trading platform. After logging in you can trade in the financial markets and start with your financial journey.

Charges Related To Demat Account

Brokerage Fee

The charges depend upon the broker. The majority of new brokers provide demat accounts with zero brokerage charges on the delivery segment. They charge a fixed amount if you want to trade intraday or in the derivatives segment.

Annual Maintenance Charge

It is an annual charge that is debited from your demat account. The DP charges an annual fee for maintaining the demat account.

Account Opening Charges

Depository participants charge a one-time fee. However, most of the DPs do not charge any account opening fee.

Transaction Fee

A transaction fee is charged when you buy or sell any financial instrument via demat and trading account. There are various ways to charge a transaction fee, some depository participants charge a flat fee. While some charge a certain percentage of the trade value.