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All You Need to Know About A Demat Account

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The process of trading in stock markets has come a long way since the time of its inception. Thanks to today's technology which has made the process even more convenient, swift, accurate, cost-efficient, giving an edge to the investors who are active in trading in real-time.

 

Earlier days investments made in shares and other securities used to be done through paperwork which was at the risk of either getting damaged or stolen. In addition to this, one had to run from pillar to pillar to get the certificates of stock tradings done. But the introduction of Demat Account has bought in advancement for the investor community, who can deal with the trading activity at ease without facing any hindrances.

Let's understand in detail about Demat Account and its features.

All You Need to Know About A Demat Account

What is a Demat Account?

The term Demat is the short form of Dematerialized Account. It refers to an account to hold the financial securities be it equity or debt in an electronic form. The introduction of demat account paved the way for the movement to electronic bookkeeping of securities from the old version of physical certificates.

A Demat account acts similar to that of a bank account and the only difference is instead of money the demat account holds your securities like shares, bonds or debentures, government securities, mutual funds, exchange-traded funds.

It is mandatory for investors who trade in stock markets to have a demat account and should open a Demat with a Depository Participant (DP). The main aim to open a demat account is to negate the need for the investors to hold on to physical share certificates and to expedite for easy tracking and supervise the holdings.

In India, the Demat Account is primarily maintained by two depository organizations namely - National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Features of A Demat Account

Features of A Demat Account

Speed E- Facility

The NSDL will allow its users to send instruction slips through electronic mode instead of a physical one while submitting to the DP which makes the process easy and consumes less time.

Zero Balance

The demat account can be held by investors without possessing any shares or other forms of securities with zero balance.

Safety Concern

Previously, the shares and stocks were held in physical form and it was a risky affair as chances of losing, misplacing or getting damaged were always there. The introduction of demat account addresses the safety concern as securities can be stored in electronic format.

Features of A Demat Account
 

Features of A Demat Account

Instant Dematerialisation and Rematerialisation of Securities

The holders of demat account can provide instructions to their respective Depository Participants (DP) to switch to electronic form from physical certificates. If the need arises then, electronic securities can be reconverted back to physical certificates.

Easy Transfer of Shares

Holding a demat account eases the transfer of holdings be it for buying or selling of shares for investors through receipt instruction slip (RIS) or delivery instruction slip (DIS). These slips will help the users to provide all the required details for executing a transaction easily. One can easily access details of the trading and can make a quick decision right away (real time trading).

Freeze Demat Accounts

The holder of a demat account can freeze their account for a specified period if the need arises. This choice will come in handy for those who prefer to prevent an unexpected credit or debit into one's demat account. The option of freezing a demat account is accessible for a specified quantity of securities which are held in the account.

Features of A Demat Account

Features of A Demat Account

Loan Facility

Many lenders will offer loan against the securities which are held in a Demat account of a borrower. The holding in a demat account can be used as collateral to secure loans by the account holders.

Mandatory for Trading

As per the Securities Exchange Board of India (SEBI), it is mandatory to hold a demat account to trade in stock exchanges in India. It saves time as buying and selling of securities can be done online comfortably sitting in your house. It also helps investors to hold an array of investments be it bonds, mutual funds, stocks, exchange-traded funds under one single demat account.

No Stamp Duty Charges Levied

The demat account has revolutionized the trading business as there is no stamp duty charges levied on the trader to transfer securities in electronic form and the cost incurred in the process of trading is also bought down. Liquidity of shares is high as securities can be purchased or sold easily, instantly in a hassle freeway.

Benefits of holding a Demat Account

Benefits of holding a Demat Account

  • Trade or invest online.
  • Reduces the paperwork.
  • An investor can sell any number of shares or securities as per their convenience.
  • Holds the shares and securities safely.
  • Convenient and faster electronic settlement.
  • Transaction cost is slightly lower when compared with the physical segment as no need to pay stamp duty charges.
  • Eliminates the risk factor which is associated with the physical certificates such as fake certificates, theft, loss or non - delivery and so on.
  • Easy access and monitoring of holdings conveniently.
  • The digital format and ability to conduct online transactions will reduce the time consumed to buy, sell or transfer funds and securities.
  • Bonus issues, stock split or right shares offered by firms will automatically get updated in the demat account, which means the dividend, refunds or interest will reach out to the demat account holder instantly.
  • Hold all the securities (equity, bonds, mutual funds, government securities) under one roof in an organized way.
Who can open a Demat Account?

Who can open a Demat Account?

A Demat account can be opened by

Resident Individual

Any resident individual can open a demat account. As per the Income Tax Act 1961, a resident Individual is one who has

  • Stayed in India for 182 days

or

  • Stayed in India for at least 60 days or more in a year and for at least 365 days or more during the last 4 years preceding the relevant financial year.

Non - Resident Indian

A Non - Resident Indian (NRI) can also open a demat account. All they have to do is to mention NRI account to the broker of DP in their account opening form. NRIs should open a separate account for repatriable and for non - repatriable securities.

A Non - Resident Indian is a person, who does not fulfil the criteria laid out by the Income Tax Act of 1981, as a resident Indian.

Hindu Undivided Family (HUF)

A Hindu Undivided Family or HUFs can also open a demat account with a pool of asset which belongs to the family lineage. A HUF acts as a single entity for all the tax-related purposes. Demat account in case of HUF can be opened in the name of the oldest male member (Karta) who is the signatory authority unless otherwise mentioned for all the trading and demat account-related transactions.

Clearing Member

This account held by the broker is also known as pool account. The pool account will be used by the broker to hold the securities of his or her clients. It is in this account, the broker will receive all the securities from the central depositories.

Domestic Companies

Domestic Companies in India can open a demat account. As per the Income Tax Act of 1961, a domestic company is any company or a firm, whose origin is in India or any other company which is taxed in India, under the Section 2(22A) of the Income Tax Act.

How Does a Demat Account Works?

How Does a Demat Account Works?

When an investor opens a demat account, his or her account should be linked to a trading account as well which comes in with a unique identity and password. This account will be used to buy or sell securities.

A demat account will be used to hold the purchased securities. Hence whenever an investor wishes to purchase or sell a stock, they will have to log in to their respective trading account which is linked to your bank account. When a ‘Buy' or ‘Sell' request is put in the trading account for particular security with your depository participant, your DP will forward your request to the stock exchange instantly.

If you opt to buy, the stock exchange will find a seller who is willing to sell the same quantity of shares and sends out an order to clearance house to debit the particular number of shares from the respective sellers demat account and in turn will credit it to your demat account.

Please Note: The buyer and seller can hold demat account with DPs who belong to different depositories.

GoodReturns.in

About the Author

Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.

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