How does a demat account work? What are the charges involved? Here are some important things to know if you’re planning to open a demat account
The Indian economy is rapidly adopting paperless transactions. Whether it is getting a bank account statement, starting a new investment or transferring money, all such financial transactions can now be done though the paperless mode in minutes. Similarly, if you are looking to invest in the stock market to buy shares, bonds or a mutual fund, you can do it seamlessly through a demat account.
Read on as we discuss several essential characteristics of demat accounts to help you make an informed financial decision.
What is a Demat account?
Demat is an electronic account which is used to keep eligible scrips in the dematerialised form. In the past, shares, bonds and mutual funds were only traded in physical form. Understandably, dealing with them was time-consuming, and even risky, as revealed by several cases of fraud. The process of dematerialisation of shares was initiated in 1996 wherein physical shares were converted into electronic form.
How does it work?
A demat account is similar to a bank account. When you buy a share through an intermediary (stockbroker or bank) from a stock market, i.e. the National Stock Exchange or the Bombay Stock Exchange. Then, after clearing through the NSE Clearing Limited or the Indian Clearing Corporation Limited, the particular stock is credited to your demat account.
There are two demat service providers in India – the Central Depository Services Limited (CDSL) and the National Securities Depository Services Limited (NSDL). So, after a stock transaction takes place at the stock exchange, it is cleared by the clearinghouses, and finally, the stock is deposited in the demat account held at any of the depositories.
How to open a Demat account?
To open a demat account you can contact a depository participant (DP) such as a stockbroker or its channel partners/sub-brokers, commercial bank or financial institutions (FI).
You may need the following documents to open a demat account:
# Bank account details including cancelled cheque/passbook copy
# Identity proof such as driver’s license, passport, Aadhaar or voter’s ID card
# Copy of PAN card
# Passport size photo
At the time of account opening, you need to fill and duly sign the application form provided by the broker or bank. Usually, it takes up to two weeks to open a demat account.
Charges levied on a Demat account
# Account opening charge: Some brokers or banks levy a Demat account opening charge while there are others which offer it for free.
# Annual maintenance charge: Then there is an annual maintenance charge that most brokers/banks levy, however, some brokers waive the annual charge if the transaction volume exceeds a certain threshold.
# Transaction charge: Based on the number of transactions done through a demat account, the broker or bank may levy a transaction charge every month. Transaction charges vary across the depository participants (banks/brokers) — some may charge at a flat rate as per the number of transactions irrespective of the quantity of scrips while others may charge based on the number of scrips.
Benefits of a Demat account
A demat account offers a plethora of benefits in terms of flexibility, ease of access, security and convenience aspects.
You can apply for a loan against qualified securities which has been held in your demat account. Banks take the pledge of such shares while extending the loan.
If you have kept the shares in your demat account, they can be traded from anywhere and you can easily track your portfolio any time.
Demat accounts are highly secured because if any of the scrips are sold through your account, the proceedings can only be transferred to the bank account which is registered or linked with the demat.
On corporate actions such as bonus issues, dividends, stock splits, etc., the benefit is automatically credited to the demat account or its linked bank account.
Things to keep in mind
While opening a demat account, always provide the correct information pertaining to your bank account and nomination details.
Do note that while opening a demat account with a depository participant, requests for two types of accounts are created i.e. a trading account with the DP and another for the demat account. You don’t need to have a demat account for intraday transactions, as they can be executed through the trading account held with the DP.
Similarly, for trading in futures and options, there is no need to open a demat account. When you sell a share, the broker pulls it into your trading account from your demat account for further settlement. For transferring the share from the demat to the trading account, the broker usually gets the power of attorney signed from the account holder at the time of account opening. A power of attorney is not mandatory, but it makes the process quicker when you execute a sell transaction through the broker.
As such, while opening a demat account through a DP, check the charges such as brokerage fees, annual maintenance charge, and transaction charge and also check the quality of services such as trading platform, online and phone orders, trading through the mobile application, research support, etc.
(The author is CEO, BankBazaar.com)