What is Demat Account & How Does it Work in India?
In India, any investor who wants to invest, trade, and own securities like stocks, bonds and mutual funds must open a Demat account. In today’s digital age, we all have digital wallets like Paytm, Phonepe, and Google Pay, and also online bank accounts. The same way a Demat account (Demat is short for dematerialised), allows an investor to hold financial assets in electronic form, with an aim of facilitating safe, easy and convenient trade for users. In simple words, a Demat account is just like a bank account, the only difference being that when a bank account holds cash, the Demat account holds shares and other securities.
Demat accounts debuted in India, and prior to that investors traded in physical share certificates. However, fast-forward 2021, the Securities and Exchange Board of India (SEBI) requires everyone who wants to trade Indian securities to have a Demat account. That means a Demat account is mandatory for anyone who wants to conduct securities trading in India. These accounts are maintained by depository organisations like the National Securities Depository Limited (NSDL) or the Central Depository Services Limited (CDSL).
Demat accounts have drastically changed the way traders buy, sell and hold their securities and made trading a more open playing ground.
What is the use of a Demat account?
- To trade in stocks: If you want to purchase and sell shares in the stock market, you need to open a trading and a Demat account with any SEBI-registered stockbroker who is also a depository participant (like Arihant). Without a Demat account, you won’t be able to invest or trade in stocks.
- No paperwork and ease of trading: Before the concept of dematerialisation started, investors use to transact through physical share certificates. Dealing with these share certificates would incur a lot of paperwork and used to slow down the trading activities. Nobody used to be able to do any transaction without presenting their certificates. A Demat account, on the contrary, holds shares and securities in electronic form. Hence making it easy to transact.
- No-risk: Physical share certificates were like cash. You had to keep them safe and secure. There was always a risk of physical damage, loss, misplacement, or forgery of these certificates. It was not uncommon for someone to lose their certificate and hence all their investments. Demat accounts in India eliminate all these risks, making share transactions risk-free when it comes to maintaining the securities, giving you peace of mind.
- One point-of-contact: Your Demat account profile details is your master contact with all the companies and securities you hold in your Demat account. So in case you have a change of address or bank account, you don’t need to correspond separately about the change with all the companies. Just update your Demat KYC and all the companies will communicate on the updated address/bank. In fact, you also get auto-credit of all bonus/split or any other corporate actions directly in your Demat account. This makes your investment experience hassle-free.
- Instant transactions and all-time-access: Unlike physical share certificates, Demat allows instant transactions and no administrative work. Plus, just like your bank account, you can access your free Demat account online and even transact in it with a click of a button.
Do I need a Demat Account to Apply for an IPO?
Technically, you don’t need a Demat account to apply for an IPO. You can apply and obtain shares of IPO in physical form. However, it is better to apply for an IPO in dematerialised form as the shares issued are only tradable online. Plus, you know all the benefits of holding your shares and other securities in electronic form, rather than physically already.
It is the same for mutual funds. While you can buy and sell mutual funds without a Demat account, it is much more convenient if you do hold your mutual fund units in Demat form. This allows you to buy and sell your mutual fund units digitally without any paperwork and you can also view all your holdings in one Demat account.
Types of Demat Account
Any residential or non-resident Indian can open a Demat account. Demat accounts can also be issued in the name of minors, provided it is monitored by their legal guardian.
An investor can opt to open a Demat account of any of the following types:
- Regular Demat account – All residing Indian citizens are eligible to open a regular Demat account.
- Repatriable Demat account for NRIs – Non-resident Indians (NRIs) can open repatriable Demat accounts. Through this type of Demat account, they can transfer money from overseas provided it is linked to an NRE bank account.
- Non-repatriable Demat account for NRIs – The non-repatriable Demat account is similar to a regular Demat account but it cannot be used to transfer funds from abroad. An individual has to link an NRO bank account to own and operate this type of Demat account.
Customers holding Demat accounts need to open a free trading account, to buy or sell securities from the stock market. While respective depositories and depository participants (DPs) regulate Demat accounts, a trading account follows the regulations mandated by SEBI.
How to open Demat Account
Having a Demat account allows you to purchase, sale and store shares, apply for initial public offerings of companies, receive corporate benefits like dividends in your Demat account, hold mutual funds and bonds including government securities in your account and treat it like your identity in the Indian stock market.
Opening a Demat account has become really simple and completely paperless now.
You start with choosing your preferred broker (or DP participant), like Arihant Capital. Thereafter, you simply go to the online demat account opening link and kickstart the account opening process, which is 100% paperless and can be completed in less than 8 minutes.
- Open the account opening form
- Key-in your PAN card number and date of birth
- Enter your details like name, email id, phone number, address, etc.
- Add your bank details
- Upload the necessary KYC documents for address and identity proof (Aadhar card, passport, bank attestation, etc)
- Perform an in-person verification by recording a short clip of yourself
- E-sign the form through Aadhar linked mobile number
Once you have submitted your application, it will be reviewed and you will receive a confirmation regarding the status of your account via email. Yes, its that simple!
Thereafter, you will be allotted a 16-digit Demat account number, a unique combination of your DP ID and client ID, along with your account login credentials.
Demat account charges
Good news is, you can open a Zero AMC Demat Account with Arihant. However, to maintain and transact there are certain charges leveid in your account depending on the type of account and what kind of transactions you are performing. Here are some of the common Demat account charges you should understand before you open a Demat account:
- Annual maintenance charges (AMC): Every DP levies an AMC for Demat account. Depositories follow specific guidelines to calculate the fee applicable for each investor. However, if you are a small investor, then SEBI has instructed all DPs to waive off the AMC charges for you under the Basic Services Demat Account, or BSDA, from 1st June 2019. According to this guideline, no AMC will be applicable for debt securities of up to ₹1 lakh, while a maximum of ₹100 can be levied on holdings of ₹1 lakh to ₹2 lakh. Additionally, no AMC shall be levied in case the value of holdings (other than debt securities) is below ₹50,000 and a maximum AMC of ₹100 shall be levied if the value of these holdings is between ₹50,001 and ₹2,00,000. Another reason to invest in stock markets, isn’t it?
- Custodian fees: Depository partners charge a custodian fee on a one-time or annual basis. The sum is paid directly to the depository (NDSL or CDSL) by the company.
- Transaction charges: Your DP also charges a nominal fee as transaction charges each time financial securities comes in or goes out from your Demat account. These charges are either based on the number of transactions you make or a flat rate for the entire month.
- Demat and Remat charges: These charges are levied as a percentage of the total value of shares purchased or sold, to cover all digitization or physical print costs of securities.
Other than the above-mentioned fees, an investor is also liable to pay fees like credit charges, DP slip-book charges*, statement and SMS charges*, applicable taxes, and CESS, rejected instruction charges, etc.
*These charges depend on your chosen plan and not all DPs charge for these services.