With the share prices roaring high this season, the Demat accounts are much in demand. But before you start investing, you need to know and understand the basics of a Demat account and its aspects to properly use it. When the share trading in India was standardized, for better transactions and value, Demat accounts were made. These accounts are similar to your bank accounts with the only difference is that in these accounts, you hold your shares expect of cash like in bank accounts. The standardization of the share markets and transaction with the formation of the National Stock Exchange gave rise to the need for the Dematerialization of the shares and thus Demat accounts were evolved. The internet and the technology had a major role play in this whole journey of the development of the Demat accounts and today, Share trading has become popular in India because of all these facilities.
In this article, you can find the different aspects, benefits of Demat Accounts, Dematerialisation and also about Depositories system in share trading in India.
What is a Demat Account?
In today’s, time when everything we do is mostly on the electronic platform, that is mainly with the help of the computers, share trading has also been taken to the screen of the computers to make it way faster so that one can sell or buy at the price they seek for. The Demat accounts which can also be called or referred as the Dematerialised accounts of the shares are used for storing the stocks and the securities in the digital format or electronic one. While trading from the computer terminal, the shares are held and kept in the Demat account and used for the transaction of the shares. The Demat accounts are not only meant for the shares but for all the investment you can make in the financial industry like in government bonds, ETFs, mutual funds, shares of the private as well as government companies or organizations etc.
Insight on Earlier Trading and how Demat was evolved
It is interesting for every investor nowadays to know how the shares were traded earlier when there was no Demat account. If you have someone elderly who used to or still invest in shares from the time when there was no dematerialization, you will be overwhelmed to listen to their stories. But here is a little insight to the old time of share trading –
The system or the process were known as “Ring” and the time was around 1875 when at the Bombay stock exchange which is the oldest stock exchange after Calcutta Stock Exchange in the country, had share trading in the physical format. The traders used to shout at each other to buy and sell the shares and the transaction was made in cash and via share certificates which were in paper format. Since a lot of paperwork was involved in the process; the time taken was huge which and thus the need for the dematerialization of the shares was taken into consideration.
In 1996, the dematerialization of the shares was started and the Demat accounts came into the limelight. After the dematerialization of the shares, the same was transferred to the Demat accounts of the shareholders who earlier held the physical share certificates.
What is Dematerialization?
The term dematerialization has come in the articles till now for many times and if you are a newbie in the market, you might be wondering what is dematerialization of the shares. So, the Dematerialization of shares is the process of converting the physical share certificates into the electronic ones. These electronic certificates provide utmost help in the trading process by quickening the trading process itself. Moreover, today, you can trade from the comfort of your home, while traveling and any possible time you want to trade when the markets are open. You can invest in foreign shares as everything is now processed by the technology and there is hardly any barrier in the investment field due to the dematerialization process.
Facilities of Depositories
Like Banks are maintained and controlled by the Central Bank which is RBI in India, likewise, the Demat accounts are maintained and controlled by the Depositories in India. The two depositories which function in India are the Central Depository Services India Ltd. (CDSL) and the National Securities Depositories Ltd. (NSDL). The Demat accounts are provided by these depositories via the stockbrokers, Depository participants, and other intermediaries. The charges of opening the accounts depend on the volume of the shares which is helpful in the account, types of the shares and also depends and vary according to the DPs.
Facilities like regular account statement of the shares you held are provided by the DPs, the transaction details, etc. It can also help in using the Demat for hypothecation against long from banks, mortgage etc. The nomination facility for the Demat accounts is also provided by the depository participants and the depository itself.
Features of Demat Accounts
There are various features and objectives which is there in a Demat Account and the process of Dematerialization of the share trading and they are mentioned below –
- Almost No Paperwork: Earlier, the main barrier in the share trading was the bulk of documentation in the physical form which was required but with dematerialization, the shares are now traded electronically and thus the physical paperwork which used to consume a lot of time has been reduced to almost nil. The process has become less tiresome as well as efficient and convenient for the investors, brokers, Depositories and the Exchanges as well as the companies.
- Risks are minimal: With physical shares certificates, there were the risks of damage to the physical paper, fake documentation, misplacement etc. With the electronically held shares, these risks are eliminated and thus one can securely handle the accounts and trade in shares.
- Costs of share trading have also decreased: The extra charges had to be incurred on the stamp duties, handling charges or the postal charges of the security certificates but with electronic share certificates, there are no such expenses. The exact cost of the transaction share can be calculated now even before buying or selling the shares at every cost are fixed and transparent.
- Quick and Instant Process: With Demat accounts, you get the shares in the account the same time you made the transaction but earlier, the physical shares used to take more than weeks to get delivered to the owner of those shares. The payment methods are also flexible and secure making the entire process really quick and instant.
How Does Demat Account Works?
As discussed, the Demat Accounts are maintained by the Depositories and the Depository participants facilitate the accounts to the investors. The Investors has to be buying the Demat accounts from the DPs and they are the only bodies who are authorized to provide the Demat services from the Depositories to the investors. Now, when shares are traded, the information goes to the depositories, they release the shares and then via DPs the shares get into the Demat accounts of the share purchaser and get out of the Demat account of the share seller.
There is a unique identification number assigned to the Demat accounts and with that number, the shares are deposited in the correct Demat accounts when transacted. Since the number is registered with the specific Demat account, you don’t have to provide or use the number each time you trade. The depositories will deliver a statement which has all the records of transaction and balance of shares of the month and you can check them thoroughly.
How to open Demat Account?
The process of opening a Demat account is almost similar with every Depository participant and the steps are as follows:-
- First, you need to select a Depository Participant. There are many in India, you can choose according to your requirement and the brokerage they charge etc.
- Then you have to fill the form for opening the Demat account.
- They will give you a list of documents to be submitted. Make photocopies of each of the documents required and self-attest them and send or mail them to the depository participant.
- PAN card is mandatory for opening this account in India.
- After the verification of the documents and maybe there will be also in-person verification as well, the Account number and the details will be provided to you by your DP.
Fees of Demat Account
There are different types of fees which you have to pay for opening, maintaining the Demat account. There are mainly three types of fee or charges which you have to bear:
- Demat Opening Charges: This charge is dependent on the DPs; there are various discount brokers in India who don’t charge any fee for opening up a Demat Account. Others who are not the discount brokers charges opening fee for the Demat accounts.
- Annual Maintenance charges: The AMC is compulsory for the Demat accounts. This is a nominal fee which you have to pay for maintaining the account with the DPs and the Depositories.
- Transaction Fees: This is a variable fee depending upon the transaction and the value of the transaction in your account.
Benefits of Demat Account
The benefits of the Demat accounts are many and they are discussed below:
- One Account for All Investment: Whether you have investments in bonds, shares, futures, options, etc., one Demat account is enough to hold all your investment. You can connect it with the bank accounts and make the transaction as smooth as possible. You can use the same account for mutual funds investment as well, what else do you need? It is a single account with multiple facilities.
- Automatic Update: Since it is completely based on technology and electronic systematization; you don’t need to update anything after making the transaction. Once your transaction is done, the number of shares, balancing of shares and everything will be done on its own in the Demat account.
- Digitalization: With the digitalization of the share trading, there is no hustle regarding the paper or physical trading of the shares. There is no requirement for huge documentation as everything is done online and on the electronic platform.
- Decreased Expenses: Since the paper evidence of the shares has been eliminated, the stamp duties are not required and similarly, there were many other expenses which were there earlier which has been decreased with the electronic share trading.
- Secure: It is utmost secure and there is no risk of displacement of the physical share certificates, damage of the share certificates etc. Moreover, no one can make fake share certificates and fool the investors.
- Time efficient: The Demat account and the electronic share transaction is high time efficient as the time consumed earlier in the physical share trading has been reduced due to the technologies and the digitalization of the process. Now everything is done within a fraction of seconds.
Difference between Trading and Demat Account
Often people get confused about the trading and the Demat account. Are they same or different? What is the use of both of the accounts in trading? There are many more questions which come to our mind about these two accounts.
So, let see how these accounts are different from each other –
- When the Demat Account is used for storing the shares, the trading account is used as the intermediary between the Bank and the Demat account for the trading of the shares. It is used for the selling of the shares and it is used like a current account for the purchase of the shares.
- If the investors or trader trade in shares/stocks, both the Demat and the trading account is mandatory and required. But if the investors’ trade in futures, options, and currencies that is except the shares of the companies, then only a trading account would do.
- The charges of the accounts differ from each other. While the Demat account attracts the annual maintenance charges and transaction charges beside the opening charges (if any), the trading account only has opening charges.
Is Demat Account compulsory for making the investment?
Yes, Demat accounts are mandatory in India for making investments in the capital market. Whether you invest in shares or the bonds or any other financial instruments, there is the requirement of the Demat accounts. There is another clause to this, that if there is a public offering which is more than 10 crores and an investor wants to buy a share of that issue or company, it has to be done through the Demat account.
Why closing of Demat account is necessary if not in use?
Since there can be many fraudulent activities with the Demat or the trading as well as the bank account, it is mandatory to close the Demat account if it is not in use anymore. The depositories made it mandatory by law.