Earlier, investors had to maintain physical records as proof of their investment holdings. They had to visit the head office of the companies whose stocks they wished to purchase. This proved to be highly inconvenient, especially when they desired to invest in multiple stocks across different companies.
To do away with such complex formalities, the Securities and Exchange Board of India introduced the Demat Account in 1996. They made it mandatory for every investor to open a Demat Account if they wanted to invest or trade in the Indian stock market.
Purpose
In order to acknowledge the benefits of a Demat Account, it is imperative to understand its purpose. Short for Dematerialisation, Demat Account aims at simplifying the purchase and sale of stocks. It converts the holder’s securities into electronic form. These include Stocks, Bonds, Mutual Funds, ETFs, etc. It even offers the holder easy access to their assets allowing them to manage their investment portfolio efficiently.
For instance, if the holder purchases the shares of XYZ company, they receive the entry of the same in a digital form in the account. This allows the holder to track their investment holdings systematically and manage them when necessary.
Operation
Once you open a Demat Account, you get a linked Trading Account. This account allows you to buy/sell shares, whilst the Demat Account holds the purchased shares. Therefore, if you want to buy or sell a specific stock, you must log in to your Trading Account first. You must then put in a ‘buy’ or ‘sell’ request for your desired stock, along with other relevant details.
Upon doing so, your Depository Participant (DP) will forward this order to the Stock Exchange immediately. If you put in a ‘sell’ request, the Stock Exchange will find a buyer who wants to purchase the same shares. Once the order is executed, they will send an order to clearance houses to credit specific number of shares to the buyer’s Demat Account and debit the same from yours. It is worth noting that the buyer and seller can hold Demat Accounts with DPs belonging to different depositories.
Significance
Having a Demat Account benefits the investor in multiple ways. Apart from the apparent convenience, it reaps various other perks. So, here is a list of them which justifies why every Indian must avail of this facility:
Eliminates plausible risks
The risks associated with holding paper documents are countless. There is always a likelihood of theft or physical damage. Besides, it is an outdated way of handling your investments. This is precisely why it is wise to opt for a Demat Account. The account holds all securities in one place, serving as a one-stop shop for the same. As it is digitised, investors need not stress about misplacing important certificates.
Facilitates smooth transfers
Consistent portfolio management is key to mitigating risks and maximising returns. A Demat Account aids this practice by allowing you to move your investments when needed. It gives you the liberty to monitor and manage your portfolio the way you want. Moreover, most DPs offer a trading app which you install on your smartphone. It lets you handle your investment activities more swiftly.
Offers sufficient storage
If you are concerned about whether you can hold numerous securities in the account, fret not. Demat Accounts provide the holder with ample storage to hold any number of investments. However, if you want to segment your investments more systematically, you can opt for multiple Demat and Trading Account.
Soon, holders will be allowed to issue academic mark sheets in Demat form. Owing to this, the usefulness of Demat Accounts in India is likely to rise.
Performs automatic updation
Let us assume that you hold XYZ company shares at present. A few months later, the same company implements a stock-split in its stocks. Now, this information will be updated in your account automatically. You do not have to update the details manually.
Types
A Demat Account comes in three distinct types to cater to your financial needs. They are as follows:
- Regular Demat Account- This is explicitly for Indian citizens with a domestic Bank Account
- Repatriable Demat Account- This type is meant for Non-Resident Indians (NRIs). It enables such individuals to transfer funds abroad. However, for a successful operation, it should be linked to their NRE account.
- Non-Repatriable Demat Account- This is also designed for NRIs. But it does not allow the holder to transfer funds abroad. In addition, it must be linked with the holder’s NRO Account.
Provides nomination facility
In the unfortunate event of the holder’s demise, the ownership of the Demat Account is automatically transferred to the nominee. This implies that the nominee will receive the shareholdings or other contents in the account.
Zero Brokerage facility
A brokerage fee is a commission the broker charges you to execute transactions on your behalf or for specialised services. You incur such costs when you open a Demat Account and start trading via the share trading app. However, some brokers like m.Stock offer Zero Brokerage Demat Accounts. This means you can trade across all securities without paying any brokerage charges.
No stamp duty
When you transfer securities the traditional way, you are expected to pay stamp duties for each transaction. However, this isn’t the case in a Demat Account. It does not mandate stamp duties, ensuring hassle-free and low-cost transfers.
Access to corporate benefits
Once you start investing in market securities through the account, you enjoy various corporate benefits. For example, you get access to perks like dividend payments, refunds, interest on investments, etc., provided by the companies wherein you have invested thus far.
Loan & Overdraft facilities
One of the best advantages of owning a Demat Account is that you enjoy loan and overdraft facilities. You may utilise your existing securities as collateral to avail yourself of such offerings.
Procedure for opening a Demat Account:
Thanks to the vast availability of online providers, opening a Demat Account has become pretty easy. This is another reason to opt for a Demat Account. You only have to follow these simple steps:
- Select a reliable Depository Participant (DP) and visit their website
- Provide your mobile number and fill out the online KYC
- Upload your address proof, identity proof, date of birth, and PAN number for verification
- Choose from the payment options to open a Trading Account suitable for you
- Add your Bank Account to complete your profile. Then, provide your digital signature (eSign) in the account opening form
Once your details are verified successfully, the DP will activate your Demat Account within 24 hours. The login credentials and other relevant details will be shared on your registered email ID.
Conclusion
A Demat Account is essential for every equity delivery trade in India. It is also a prerequisite while applying for significant investments like IPOs (Initial Public Offerings), as the allotted shares get credited to the account. Therefore, Indians must make the most of this beneficial facility to kickstart their wealth-building journey securely and efficiently.
