Since their introduction in 1996, Demat accounts have become a must-have for any investor in India wanting to buy stocks or bonds. It holds your share certificates and other securities in electronic format. A Demat account is as important for stock investments as savings accounts for banking.
A Demat account allows you easy access to your funds and makes it easy to buy and sell stocks. Moreover, it eliminates the risks involved with physical certificates. Therefore, you will want to open a Demat account to start your investment journey.
Read along to know more about Demat accounts.
What Are Demat Accounts?
A Demat account or Dematerialisation account lets you store various securities in electronic format. You can use it to hold all your investments, including stocks, bonds, mutual fund units, government securities, ETF (Exchange Traded Fund), etc., in one place. Demat accounts have made storing stocks entirely paperless and streamlined the share trading process.
Before the digitization of the Indian stock market, shares were held in physical form. Trading in physical shares was troublesome, taking several days for an investor to open an account. Today, you can easily open a Demat account in a few minutes to store/trade shares.
How do Demat Accounts Work?
All Demat accounts in India are maintained by two Depositories- NSDL (National Securities Depository Limited) and CSDL (Central Depository Services Limited). Depository Participants (DPs)such as financial institutions, stockbroking firms, etc., offer Demat accounts to the public for holding stocks and other securities.
Besides a Demat account, you will need a trading account to hold money for trading and a bank account for transferring funds. You can open a combined trading and Demat account with Arihant Capital for hassle-free trading. When you need to buy or sell a particular stock, you need to log in to this account and place a ‘buy’ or ‘sell’ request via your trading account.
The Depository Participant forwards your request to the respective stock exchange, which helps to find a corresponding buyer or seller. When the order price and quantity match, it sends an order to clearance houses to debit or credit the shares to your Demat account. This is how a single trade takes place via a Demat and trading account.
Types of Demat Accounts in India
The following are the main types of Demat accounts in India:
- Regular Demat account: These Demat accounts are meant for investors residing in India. NSDL and CSDL provide regular depository services through DPs, intermediaries, and stockbrokers. Charges for these accounts depending on the type of securities, holding value, and the DP’s terms and conditions.
- Basic Services Demat Account: Recently, SEBI has introduced a new type of Demat account called BSDA (Basic Services Demat Account) to encourage the entry of new investors. This offers nil maintenance charges for a holding value of below Rs. 50,000 and charges a fee of Rs. 100 for a holding value of Rs. 50,000 to Rs. 2,00,000.
- Repatriable Demat account: Non-Resident Indians (NRIs) can open a Demat account of this type to invest in the Indian stock market. Once they become an NRI, they must close their regular Demat account and transfer the securities to an NRO (Non-Resident Ordinary) Demat account. Once done, they can open an NRE (Non-Resident External) account to receive payments.
- Non-repatriableDemat account: Non-residents can also open a non-repatriable Demat account to hold Indian stocks. However, this account does not allow investors to transfer funds abroad. Moreover, they need to link an associated NRO bank account.
Reasons for Opening a Demat Account
The following are some reasons why you may want to open a Demat account:
- Mandatory for trading Shares: SEBI (Securities and Exchange Board of India) has made it compulsory for everyone to have a Demat account to trade Indian securities.
- Near-instant trading: With Demat accounts, you can get online transactions processed almost instantly. Investors can also dematerialize their physical share certificates into an electronic form or rematerialize online securities into physical documents.
- High security: Storing shares in a Demat account is much safer compared to physical storage as there is little risk of loss, theft, and fake signatures. It stores all securities safely and securely in a digital repository.
- Easier to manage: You can access a Demat account anytime and anywhere from your mobile or laptop. It lets you track account activities and information regarding your investments. Moreover, you can get useful updates.
- No minimum balance requirement: There is no minimum balance or trading requirement with a Demat account. This works well for long-term investors and those who trade infrequently.
You need to open a Demat account to start investing in the Indian stock market. It is a much better alternative to trading with physical share certificates as it offers better security and faster transactions. Before choosing a DP for your Demat account, make sure to look at its applicable charges, including account opening charges, maintenance fees, transaction charges, etc.