Demat Account

Why Demat Account is necessary and how to open one?

It has been a long time since the physical shares were replaced with its electronic form by the passing of the Depositories Act, 1966.

With the enforcement of this Act everything related to securities like purchasing, selling and holding of the securities was dematerialized and made electronic replacing the traditional physical trading of shares and other securities.

Now, in order to buy, sell or hold securities one needs to have a demat account. Having a demat account these days is as important as having a Bank account.

In this article we will discuss the following things for your learning:

  1. What is a demat account?
  2. What are the uses and benefits of a demat account?
  3. What securities can be kept in a demat account?
  4. How to open a demat account?
  1. What is a demat account?

    Demat or Dematerialized Account allows the investors to hold their shares and securities in an electronic form thereby making management of securities quick and hassle-free.
    Just like a bank account, you demat account holds deposits of your securities and is debited and credited like a bank passbook.
    As per SEBI mandate in the year 1966, it is compulsory to hold a demat account if you want to invest your money in the stock market.
    People are often confused if there is any difference between a demat account and a trading account or are these two same.
    For your understanding let us clarify that a Demat Account is a medium to hold/store the securities that you already have in your portfolio but cannot be used for buying and selling of securities.
    For buying and selling securities you need to have a Trading Account. A trading account is like an intermediary between your bank and your demat account.

  2. What are the uses and benefits of a demat account?

    A demat account offers the following benefits to its holder:

    1. It is easier to transact and manage your securities through a demat account as you can keep multiple securities in a single account.
    2. The processing of transaction becomes quick and convenient. The investors need not visit the company now and invest a lot of time in purchasing or selling securities. Once an investor buys a share, it will credited to their account within 2 business days which is quite quick.
    3. Since buying, selling and managing of securities can now be done online the geographical barriers are resolved and investors can trade anytime anywhere as per their need.
    4. There are no restrictions on the number and quantity of securities you need to transact. Earlier if the number of transactions were below a specified lot, the investors were required to pay a premium for the same.
    5. You can keep any types of securities in your demat account.
    6. You save on the cost of registrations and dealings as you no longer need to pay stamp duty for entering in an agreement with your depository.
    7. You need not communicate with the companies and go through procedural formalities. You can simply communicate with your depository and gets things done quickly.
    8. The manual paperwork required during trading of securities tis reduced to a great extent.
  3. What securities can be kept in a demat account?

    You can trade following securities or hold and kept them in your demat account:

    1. Stocks (share)
    2. Mutual Funds
    3. Bonds
    4. IPOs
    5. NCDs (Non-Convertible Debentures)
    6. Gold and many more
  4. How to open a demat account?

    Opening a demat account includes certain steps which are not only important but are also necessary to be followed. The steps for opening a demat account are as follows:

    1. Identify and select your DP: DP stands for Depository Participant who work as the agents of depositories in India. There are only two depositories in the country namely NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). Depositories are the institutions that hold your securities in a dematerialized form.
      DPs on the other hand the intermediaries between an investor and the depositories.
      In order to offer depository related services DPs are required to register under Section 12 (subsection 1A) of the SEBI Act.
      It is completely a choice of the investor to select a DP based on the features they offer like demat charges, location, customer support services etc.
    2. Documents required to open a demat account and the procedure to be followed: Mainly following four documents are required for opening a demat account: Id proof and proof of residence, PAN Card and Aadhar Card.
      You need to submit a self-attested photocopy of all the documents which are required for opening a demat account.
    3. Sign the DP Agreement: along with the documents mentioned above, the investors are required to submit a DP agreement. It is an agreement between the investors and their DP and each page of the agreement should be signed.
      The agreement varies from DP to DP however, SEBI has set outlines for such agreements. It contains a list of responsibilities and obligations for a demat account holder.
      The agreement also contains a schedule of charges to be applied by the DPs.
    4. Filing nomination along with the demat account opening form: For all your financial assets including a demat account you must fill a nomination form at the initial stage itself. Nomination means that in case of your demise, the securities will delivered to the beneficiary.
    5. Setting up the demat account with your DP: After the documents and the agreement are submitted, the DP will verify them. It is then forwarded to the compliance department for compliance related approvals. Only after the approval from the compliance department the demat account is opened.
      Once the account is opened your DP will grant you a code which is called the Beneficial Ownership Identification Number or “BO-ID”.
      If you purchase any financial security your demat account will be credited. If you sell your securities your demat account will be debited. The money raised through it is collected by your depository.
    6. Signing a Power of Attorney with the depository participant: Signing of a power of attorney is somewhat mandatory. POA is not necessary for an investor, but in case of trader it is important to sign a Power of Attorney during the time of opening a demat account. This POA empowers your broker to automatically debit your account when you sell your securities.
    7. Opening a Digital demat account through Aadhar: With the advancement of technology and everything getting online it is now possible to open a demat account as well using your Aadhar Card authentication.
      In order to open a demat account online through your aadhar card, you must be sure that your aadhar card is mapped with your bank account. Also the mobile number for your aadhar card and demat account opening should be the same. The authorization and verification will be done through the OTP sent on your registered mobile number. In this case the only documents that you need to submit to your broker are a copy of your PAN Card and a cancelled cheque.
      Next an in-person verification is done either through a conference call or by visiting at the nearest customer point of the selected DP.
      After these two levels of verification your demat account is activated.

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