What is a Demat Account?

What is a Demat Account?

Posted by Creditkaro

General May 23, 2022

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).


Types of Demat accounts

There are primarily three types of Demat accounts offered by depository participants in India.

A. Regular Demat accounts

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.

B. Re-patriable Demat accounts

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.

C. Non-repatriable Demat accounts

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.

Features of Demat 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.