What is a Demat Account?
Posted by Creditkaro
What is a Demat Account?
Demat is a critical
instrument for getting the most out of customers' capital and protection. Demat
accounts help the traders to make share trading fast and easy. It helps the
traders to get rid of the risks and challenges associated with physical share
certificates. In India, it has become essential to open Demat accounts for any
investors if they if you wish to invest in the stock market. Earlier, shares
were held in physical forms through share certificates. However, share trading was cumbersome and difficult to carry out at short notice in this process. For the avoidance of these limitations, the National Securities
Depository Limited (NSDL) was established in 1996. They introduced the concept
of Demat accounts that could be used to electronically store shares and
securities of companies. If respective traders have physical shares they need
to convert them to electronic records before using Demat accounts. This process
is commonly known as Dematerialization.
Importance of
Demat account
The traders can
hold on to a variety of investments such as bonds, equity shares, government
securities, mutual funds, and exchange-traded funds (ETFs) with Demat accounts.
Just like the bank accounts, Demat accounts are either credited or debited each
time traders buy or sell shares of their respective companies.
It eliminates
unnecessary paperwork as well as helps to rationalize the process of share
trading. All of the Demat accounts in India are maintained by two depositories,
namely National Securities Depository Limited (NSDL) and Central Depository
Services Limited (CDSL).
How does a
Demat Account work?
The nature of the
Demat account is identical to a savings bank account. It helps traders to store
cash in electronic forms in their savings accounts. The investors can also store
securities in the Demat accounts of depository participants (DP) associated
with the NSDL or CDSL. When shares or securities are bought, the Demat account
is credited. However, the account is debited when shares or securities are
sold. For transactions in equity and securities through the traders' Demat
accounts, it is required to link it to respective investors' trading and
savings accounts.
Documents
required for Demat account opening
For the expedient
and hassle-free process of opening Demat accounts, the investors must have some
essential documents such as proof of identity with photographs, (for example,
Aadhaar card, PAN card, voter ID card, driving license, etc.), residential proofs,
of residence like registered lease agreements, driving licenses, passports,
landline telephone bills, electricity bills, apartment maintenance bills, copy
insurance, gas bills, proof of bank accounts like respective banks' passbooks
or account statement of more than three months, proof of Income like pay-slips
or taxes.
Demat account
fees
Many foremost
depository participants in India tender exceptional services for their clients.
They charge a certain amount to open these accounts that may differ for every
participant. The investors might be confused to understand the nature of
services and fees a depository participant charges. However, the investors
should remember one thing they do not need to pay any charge to open Demat
accounts. The Annual Maintenance Charge (AMC) is also relinquished for the
first year. Here is a brief explanation of the particulars of the services.
A. Account opening fee: Rs. 295.
B. Annual Maintenance Charges (AMC): Rs. 0 (for the first year)
C. Dematerialization of share certificates: Rs. 17.7 (per
certificate)
D. Re-materialization of share certificates: Rs. 17.7
E. Conversion of mutual fund units: Rs. 0
F. De-statementization: Rs. 0
G. Reconversion of mutual fund units into the statement of account:
Rs 0
H. Redemption or re-statementization: Rs 0
I. Postal charges: Rs. 47.2 (per request).
There
are primarily three types of Demat accounts offered by depository participants in India.
These
are Dematerialized accounts for Indian residents. The residents of India who
are dealing with equity trading and investments can choose regular Demat
accounts as perfect for them.
This
is one of the two types of Demat accounts available for NRIs. The repatriable
accounts allow the traders to transfer their funds abroad if they are NRIs. The
NRIs require linking these accounts with Non-resident External (NRE) bank accounts
to repatriate their funds.
Despite
being NRIs, traders can also choose to open non-repatriable accounts. This type
of account does not allow the respective trader to transfer funds abroad. It
needs to be linked to a Non-resident Ordinary (NRO) bank account.
The
traders can earn rights to use many useful features by opening Demat accounts. They
are as follows:
A. Share transfer: Traders only
need to send duly signed Delivery Instruction Slips (DIS) to their respective
depository participants to transfer their shares.
B. Loan collateral: Traders can
pledge the securities they hold in Demat accounts and use them as collateral
for securing loans from financial institutions.
C. Temporary freezing: Traders can temporarily
freeze their Demat accounts for a specific duration. However, this feature is
generally available if the respective traders hold a specific number of shares
in their accounts.
D. Quick transfer of benefits: Best Demat
accounts offer swift transfer facilities of benefits such as dividends, bonus
issue of shares, stock splits, interest, and refunds.
E. Speed e-facility: NSDL allows traders
to electronically send instruction slips to their respective depository participants. This system makes the entire process quicker and less
burdensome also.
F. Easier holding: Maintaining
physical certificates is troublesome and risky. Opening a Demat account digitizes
the certificates facilitating easier holding and added security.
G. Multiple Access Points: Complete digital
Demat accounts can be accessed from anywhere using any digital device like
computers, mobile phones, or other smart devices.
Benefits of a Demat Account
Apart from being
an indispensable part of the share market, Demat accounts come with several
benefits: The traders with their Demat accounts can make swift settlements and
deliveries, increase share trading volume and market participation, increase
transparency, can avoid the hazard of paperwork, can make
quick and easy
communications with investors, can build trust and increase investors'
confidence.
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