Demat Account: Everything you need to know| Easy Guide!

Previously, we have discussed the basics of the stock market including a brief description of the Demat account. If you haven’t gone through it, click here. Demat account is the first and foremost thing needed to invest or trade in the stock market. In this article, let’s discuss everything you need to know before opening a Demat account.

DEMAT ACCOUNT

Demat implies Dematerialized meaning “Replace physical records with digital”. In 1996, Dematerialization was adopted in the stock market. Before that, shares are held physically in the form of paper. The Demat account allows investors to hold the shares or other securities in electronic form. In India, these shares are held at centralized depositories namely National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL). While NSDL has the National Stock Exchange (NSE) as the primary market. Similarly, CDSL has the Bombay Stock Exchange (BSE) as the primary market.

Briefly, Just like a Bank stores cash in electronic form, the Demat account stores stocks, Mutual funds, ETFs, and commodities in electronic form.

HOW DEMAT ACCOUNT WORKS?

As already discussed in the basics of stock market, trading/investing requires Demat account along with trading account and Bank account. Now, let’s us understand the working principle of Demat account. We cannot use the funds directly from bank account for trading/investing. Firstly, Funds should be transferred to trading account from bank account. Then the added funds can be used for buying and selling of stocks and other securities.

The funds in the trading account will be utilized whenever the investor buys/sells a stock. On the contrary, while selling the stock, the profit/loss along with the capital invested goes back to the trading account. Later, the funds in the trading account can be withdrawn to the bank account after settlement. Usually, it will take T+2 days for withdrawal after trading.

BENEFITS OF DEMAT ACCOUNT

The following are the benefits of Demat account.

1. Paperless: Since everything goes paperless, It’s hassle-free.
2. Application/Software: Buying and selling of shares, technical analysis, charts, scheduling of orders, etc., are the features available in the Broker’s application or Website. Shares can be bought and sold with a single click.
3. Safety: Don’t need to worry about the safekeeping of share certificates like olden days. It’s available 24/7 in the Demat account securely.
4. Collateral/Credit: Ease of loan disbursement from the bank with the security holdings as Collateral in Demat account.
5. Transfer of Shares: Shares can be transferred from one account to the another account. Delivery Instruction Slip (DIS) should be obtained from the broker to perform this action. The brokers will provide the procedure for the same.
6. Support/Assistance: The Support team will be available for any technical glitch that occurs in the website or the application of Brokerage. Ease of contact through emails, chatbot, Phone, etc.
7. Rematerialization/Dematerialization: Physical share certificates can be converted to an electronic form which is known as Dematerialization. On the other hand, Rematerialization is the counterpart where the electronic form of shares can be converted to physical shares. Brokerages can help to complete the process.
8. Deactivation of Account: Demat Account can be deactivated or frozen for a particular period. This can be done either online or offline. For example, If the trader feels like making a loss every day, the trader can freeze the trading for a period.

DEPOSITORY PARTICIPANTS

DP or Depository Participant is the interface between the investor/trader and the depositories. SEBI regulates the registered DPs. The investor/trader will be provided with a unique DP ID which is used in combination with the Beneficiary ID. This combination is called a Demat ID. Beneficiary ID is to identify the Demat account of the trader/investor with the Service provider(Bank/Brokerage).

DP ID + Beneficiary ID = Demat ID

Don’t get puzzled! Simply put, DP ID is just like a bank account with MICR and IFSC Codes. Having a basic knowledge of it is well enough. If the depository is NSDL, the Demat ID will be 14 digits. Whereas for CDSL it will be 16 digits.

MUTUAL FUNDS DOESN’T REQUIRE DEMAT

It is not mandatory to have a Demat account for Mutual Funds. The Asset Management Company (AMC) directly allows investors to invest in their Mutual Funds. And, visiting the respective websites or walk-in to their Physical office can help. Also, many service providers are allowing investors to invest in Mutual Funds through their channels. Ultimately, Using a Demat account to invest in Mutual Funds can make all your investment in a single entity, hassle-free.

TYPES OF SERVICE PROVIDERS

There are three types of Service providers for opening a Demat account. Additionally, The services varies with brokers.

1. Bank: Bank provides Demat accounts for the account holders in their respective banks. Moreover, Bank provides 3 in 1 Account that includes Bank Account, Trading Account and Demat Account.
2. Full-Service Broker: As the name suggests, Full-Service Brokers provide complete service to their customers. This includes Research tools, ideas, tax planning, technical reports, etc.
3. Discount Broker: Unlike Full-service brokers, Discounted brokers will not provide more tools and tips for their customers. They offer cost-effective plans for brokerages.

HOW TO SELECT BROKER?

Every individual should take care of selecting the right broker before opening the Demat account. This depends totally on the individual need. Here are some of the aspects to watch while opening the Demat account.

1. Reliability: Check whether the broker/bank has a strong foundation in the trading sector. Visiting their website and verifying whether it is registered with SEBI can help. Also, check whether it has a record of long existence, Number of clients, reviews, etc.
2. Ease of opening an account: Almost every broker made the account opening process very simple. Just need to fill the form with Identity Proof (PAN Card, Address proof, pay slip, etc.,). It can be done in the time of making a Maggie! Activation of account takes some time to verify all the particulars.
3. Software or User Interface: Firstly, get to know the look and feel of the trading websites/mobile applications of the broker. Secondly, Always choose the UI which is user-friendly and easy to understand. Finally, check whether the platform can be accessed from all devices such as Mobile Phones, laptops, tablets, etc.,
4. Annual Maintenance Charge: AMC or Annual Maintenance Charge is charged annually for the maintenance of the account. Some brokers provide lifetime free AMC. But, Be careful! nothing is free in this world. If it’s free, it has its limitations. Usually, banks levy high AMC than discount and full-service brokers. Even if you haven’t traded any in a particular year, AMC will be levied.
5. Brokerage and Trading Cost: Brokerage is nothing but the fee paid to the broker for the transactions. If the account is only for investing, don’t need to worry about brokerage. It will be very minimal or even Zero in many brokerages. On the Contrary, for trading one should look for the brokerage cost, DP charges and other transaction charges before selecting the broker.
6. Add-On Facilities: Support assistance for technical difficulties, Learning platform, Relationship Manager(RM), Research tools, Other securities investments, etc., are the Add-On facilities. This may vary with brokers.

TO WRAP THINGS UP

Finally, hope my readers got some insights on Demat Account and its importance, selecting brokers, etc. If you’re a beginner SimplyRead suggests going with Discount brokers. Likewise, for Investors, it’s better to go with Full-Service Brokers since there won’t be many transactions and all features will be available.

Choosing Bank is up to individual’s choice. In banks, charges will be higher but the support assistance will be better. You can have all accounts on the same plate. I’ll provide the account opening links at the end of the article.

So, Which broker you’re going to choose? Let me know in the comment box!

Also read: 6 Simple ways of investing in Gold- A Cushion! – SimplyRead , Invest In Yourself-The Skeleton Key to unlock your potential! – SimplyRead , https://simplyread.co.in/lets-multiply-not-just-numbers-but-real-money/

REFERAL LINKS FOR BROKER

1. Zerodha: https://zerodha.com/open-account?c=JL3357
2. PaytmMoney: https://paytmmoney.page.link/3L1iSDbjqQM3aVHRA
3. IIFL Markets: https://cutt.ly/dK3gS0e
4. Finvasia: https://prism.finvasia.com/register/?franchiseLead=NjM5MjI=

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FAQ’s

1. Can I have multiple Demat accounts?
Ans: Yes. you can have multiple Demat accounts.

2. If I am not using trading for a year, is still AMC applicable for that year?
Ans: Yes. As long as you have an account, AMC is applicable.

3. Which is best? opening an account online or offline?
Ans: Most brokers today support online account opening. Go digital!

4. Do the bank account should be in the name of the Demat account holder name?
Ans: Yes. Bank, Demat and trading account must be of the same person. As a result, You cannot use the other person's bank account for transactions.

5. What happens if I don't pay the AMC?
Ans: The Demat account will become dormant. Therefore, You need to activate it to make transactions.

6. Can a minor have a Demat account?
Ans: Yes, with the support of Guardian until the minor becomes major.

7. Can I add or modify the nominee?
Ans: Yes nominee with allocation can be done with proper ID proof.