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What is a Demat Account?

Demat Account – Full Information

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What is a Demat Account?

To hold financial securities in digital form and to transact in shares on the stock market, a Demat account is required. The National Securities Depository Limited and the Central Depository Services Limited are two depository institutions that look after Demat accounts in India. The digital copies of your equities can be handled and stored in a Demat account.  A Demat-Account, also known as a Dematerialized Account, offers the option of keeping shares and other securities electronically. 

When trading shares online, shares are acquired and kept in a Demat Account, making transactions simple for customers. A Demat account houses all of a person’s investments in bonds, mutual funds, exchange-traded funds, shares, and government securities. 

In other words, a Demat account, which stands for dematerialization and allows investors to hold shares and assets in electronic format, aims to make trading for users safe, simple, and convenient. When you want to trade or hold shares on a delivery basis, you need a Demat account. To open a Demat account, you need a broker. One of the primary prerequisites for purchasing and selling shares on the equity markets is a Demat, or dematerialized, account. 

In India, two depository institutions, the National Securities Depository Limited and the Central Depository Services Limited, manage Demat accounts. The Demat account number is required for all transactions in order for trades to be settled electronically. An internet password and a transaction password are required for access to the dematerialized account. Securities transfers or purchases can then be initiated. A security is a financial asset that may be traded. The phrase is often used to refer to any type of financial instrument, however its legal definition differs depending on jurisdiction. 

Once a transaction is validated and executed, the dematerialized account automatically purchases and sells stocks. Other investment securities may not be held in this account. On the contrary, your Demat Account serves multiple functions. It can store mutual funds, ETFs, money market securities, bonds, and other assets to provide you with the benefits of dematerialization.  

The Demat account must be formed in the same ownership pattern as the physical form of the securities. For example, if one share certificate is in the individual’s name and another is held jointly with someone, two separate accounts must be formed. The Indian stock exchange’s transition to digital trading was made possible by Demat, which also improved SEBI’s oversight. 

Furthermore, by keeping securities in electronic format, the Demat account decreased the risks of storage, theft, destruction, and mistakes. NSE originally made the announcement in 1996. Initial account activation required several days because it was a manual process. An online Demat account can now be opened in five minutes. Demat’s popularity, which soared during the pandemic, has benefited from the end-to-end digital procedure. When assets are held in Demat form, the risk of theft or loss is negligible. Prior to dematerialization, trade settlement took 14 days due to the physical transportation of paper shares from the seller to the RTA to the buyer.

Demat Account
What is a Demat Account?

Types of Demat Account – 

A Demat account that can be withdrawn by non-resident Indians (NRIs). Money can be sent internationally using this Demat account, but it must be connected to an NRE bank account. A standard Demat account for Indian residents who are investors.

The non-repatriable Demat account is the final category of Demat account. NRIs utilise it as well, although they are unable to move money abroad using this Demat account. An NRO bank account must be connected to this type of Demat account.

The advantages of a Demat account –

All of your securities, including shares, options, futures, commodities, mutual funds, debentures, ETFs, and bonds, are stored electronically when you have a Demat-account. You may manage your investment portfolio, buy, sell, and hold these securities all from a single window. A Demat-account provides five key advantages that are essential for success in trading and investing.

Liquidity – Trading and investing in the financial markets both demand liquidity, or the capacity to sell your securities whenever you need money. Swift liquidity is very difficult to obtain with actual shares and certificates, but with a Demat account, you are prepared to buy or sell when the market reopens the next day. With a Demat service, you may quickly and easily place a purchase or sell order and have it fulfilled before any significant price movement takes place.

Safety and security – Avoiding share theft or loss – A Demat account’s safety and security features are its most significant benefits. The risk of share certificates being lost or stolen always existed when holding financial assets in tangible form. In the event of a loss or theft, an investor would face a mountain of paperwork and other difficulties before being able to attempt to reclaim those assets. There would still be no assurance of recovery even then. Shares held in Demat form are safer and more secure to hold. When assets are held in Demat form, there is very little possibility of theft or loss.

Quicker and more seamless settlements – Due to the physical transportation of paper shares from the seller to the RTA to the buyer, trade settlement used to take 14 days prior to dematerialization. However, the settlement period has been shortened with a Demat-account from 14 days to 2 working days, saving the investors’ time, effort, and energy. As they say, “Time is money!”

Decrease in errors – Due to the volume of human labour required, there were also many manual mistakes in the world of physical and offline settlements. The term “Vanda” trades or a mistake trade was frequently used to describe this. These erroneous trades have been drastically decreased, which is one of the main benefits of a Demat-account.

Easily Transmitted – Dematerialization makes it possible for the ownership of assets kept in a Demat account to be rapidly transferred to the next of kin in the regrettable event of a Demat-account holder’s passing. Either a joint Demat-account can be opened, or the next of kin can be added as a nominee, to accomplish this. This was not feasible when shares were held in physical form since it required too much work for the legal heirs to assert their legal entitlement to the deceased Demat-account holder’s financial assets. One of the main benefits of Demat-accounts has been the simplicity of asset transmission (transfer).

Getting rid of odd-lot issues – The fact that the odd-lot problem has been resolved is a Demat account’s greatest benefit. Before the advent of Demat accounts, physical shares were only sold in lots, but now even a single share can be purchased or sold.

All assets are stored in one location – A Demat-account keeps track of all of your financial assets, including your shares as well as debentures, bonds, exchange-traded funds, unit-linked insurance plans, and more. A key benefit of a Demat-account is that all the assets are accessible from one location, making maintenance and tracking simple. As all of your records are kept in one location, it is also useful when filing taxes.

Characteristics of a Demat Account –

  • Simple access through net banking, a Demat-Account can provide quick & simple access to your investments and statements. Additionally, you can access these statistics from any smart device, whether a computer, smartphone, or other.
  • Demat-Accounts have replaced the time-consuming process with quick and simple ways to receive dividends, interest, or refunds for stock. Everything is automatically credited to the account. Additionally, using an electronic clearing service to update investors’ accounts with information on stock splits, bonus issues, rights, public issues, etc (ECS).
  • Share liquidity has improved because of demat-Accounts, which have made it easier, quicker, and more convenient to sell shares.
  • Loan against Securities: If you have a Demat-account, you may be able to borrow money against the securities you have there.
Demat Account
The advantages of a Demat account
6 Steps to Opening a Demat Account: – 

A Demat-account can be opened quickly and easily. The Central Securities Depository Limited (CDSL) and the National Securities Depository Limited are the two depositories in India (NSDL). Either of these depositories is a viable option for you to open an account with.

  •  Select a Depository Participant (DP); most financial institutions and brokerage firms are DPs.
  •  Complete the account opening form, including a photograph and photocopies of identification and address evidence.
  •  Upload your documents for verification online.
  •  Sign a basic contract with the DP.
  •  A DP staff member will now verify your documentation.
  •  Following the successful processing of your application and documentation, the DP will issue you with an account number and client ID, which you can use to access your account online.
Is it possible to have many Demat accounts? 

Yes, you can have more than one dematerialized account. You must, however, present Know-Your-Customer (KYC) papers for each account you open. There are also advantages and disadvantages to having many Demat accounts.

Documents required in opening a Demat account include: –

  • Identity verification
  • PAN card Address Verification
  • Photographs
  • Proof of income
  • Statement of bank accounts

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