Demat Account - Definition, Types, Working and Benefits

Demat account simplifies holding investments like shares, bonds, mutual funds, ETFs, etc., by eliminating paper hassles and document maintenance.
Demat Account - Definition, Types, Working and Benefits
3 mins
11 June 2024

Key takeaways

  • Demat is a type of online portfolio that contains a customer's shares and other securities
  • It has eliminated the need to hold and trade physical share certificates.
  • A Demat account is used to store shares and securities in an electronic (dematerialised) format.

 

What is Demat account?

A Demat account helps investors hold shares and securities in an electronic format. It is also commonly known as a Dematerialised account. This account helps keep track of an investor’s holdings in shares, exchange-traded funds, bonds, and mutual funds in one place.

Importance of a Demat account

  1. Digitally secure way of holding shares and securities.
  2. Eliminates theft, forgery, loss, and damage to the physical certificates.
  3. Quick transfer of shares.
  4. It eliminates unnecessary paperwork.
  5. Online opening of Demat account is simpler and faster.
  6. It eases and streamlines the process of share trading.

What is Dematerialisation (Demat)?

Dematerialisation is the process of converting the physical share certificates into electronic form, making it easy to maintain and access them from anywhere. Earlier, shares were held in the form of physical certificates, which were cumbersome to store and transfer. The advent of a Demat account made it a lot easier to handle shares. An investor who wants to convert his physical shares into digital form needs to open a Demat account with a depository participant (DP).

Features of Demat account

A Demat account is an important tool for safekeeping shares. Demat accounts eases the process of share trading and makes it quicker as well. Initially, shares were held in a physical form via share certificates. That made the entire procedure tedious and time consuming. To eliminate such limitations, the National Securities Depository Limited (NSDL) was established in 1996. They brought the concept of Demat accounts that enabled electronic storage of shares and securities of companies. In India, if you want to invest in the stock market, it is compulsory to open a Demat account.

Benefits of a Demat account

Let us explore the benefits of owning a Demat account

  • No paper worries:
    Before the advent of the Demat account, shares existed as physical paper certificates. If you held shares of a company, you had to safe keep a dozen of paper certificates. These were vulnerable to tampering, theft, loss, and forgery. Moreover, the transfer of shares involved lengthy paperwork that was prone to error and delays. With a Demat account, you can store all these shares electronically in a safe and secure digital repository.
  • Easy storage & transfer:
    This allows you to store any number of shares, so you can trade in volumes and monitor the details of all the shares you hold in a Demat account. It further facilitates the swift transfer of shares while trading online.
  • Automatic updates for bonus stock-splits:
    If an initiative of the company whose shares you are holding brings in a change to its stocks such as bonus issue, stock split, etc., it will be updated automatically in your Demat accountc.
  • All-in-one investment storage:
    Besides the shares, the Demat account can also hold multiple assets, like bonds, mutual funds, exchange traded funds, government securities, etc.
  • Easy access online:
    You can access your Demat account anytime, anywhere, through your smartphone or laptop.
  • Easy nomination process:
    A Demat account also provides the nomination facility as per the process described by the depository. In case of the investor’s demise, the appointed nominee will receive the shareholding in the Demat account.

How does a Demat Account work?

Demat accounts are primarily used to hold the bought shares.

  • In case you want to buy or sell a specific share, you need to login to your Demat and trading account, which is also linked to your bank account
  • When a ‘buy’, or ‘sell’ request is placed in a trading account, the Depository Participant, forwards this to the stock exchange on an immediate basis
  • Suppose the order is to ‘buy’, the stock exchange then searches a seller who wants to sell shares and if price matches, it is sent to clearance houses to debit those many shares from the seller’s Demat Account and credit them to the buyer’s Demat Account
  • Please note, the buyer and the seller may hold Demat Accounts with Depository Participants belonging to different depositories

Types of Demat account

In India, there are three major types of Demat accounts offered by Depository Participants.

  • Regular Demat accounts
    These are meant for Indian residents. If you are dealing with investment and equity trading, a regular Demat Account is the best option for you. Here the charges are dependent on the type subscribed, volume that is there in the account and the various terms and conditions set by the depository and the DP (Depository Participant).
  • Repatriable Demat account
    This kind of Demat Account is good for NRIs, who wishes to invest in the Indian Stock Market quickly from any part of the world. Such an account is useful for NRIs as with the help of such an account, they can transfer their funds to various foreign countries. But NRIs looking to hold a Repatriable Demat Account need to possess an associated NRE bank account.
  • Non-repatriable Demat account
    This is similar to a repatriable Demat Account and is also for NRIs. However, this account doesn’t allow you to transfer funds abroad. This requires you to link it to a Non-resident Ordinary (NRO) bank account.

Documents required for Demat account opening

To open a Demat Account without any hassle, you should have some essential documents. Listed below are the documents that’s required to open a Demat account with Bajaj Financial Securities Limited.

  • PAN card
  • Proof of address (Aadhar card, driving license, passport)
  • Photograph
  • Signature on white paper
  • Income proof, for activation of futures and options segment

How to use a Demat account?

Using a Demat account is simple. Your Demat account gets linked with your open trading account online, which in turn gets linked with your bank account. To begin trading, you need to transfer funds from your bank to the trading account.

After adding funds, you can place an order to buy shares using your trading account. Once the order gets executed, the shares will get transferred to your demat account by the end of T+1 days, where T is the day the order got executed. Since both demat and trading account are closely integrated, all these actions happen swiftly and seamlessly. Similarly, you can sell a share in your demat account by placing a sell order in the stock exchange using your trading account.

Conclusion

A Demat account is an essential tool for modern investors, streamlining the process of managing investments by holding securities in digital form. It offers numerous advantages, such as enhanced security, ease of transfer, and efficient portfolio management, eliminating the risks associated with physical share certificates. Opening a Demat account is straightforward and can be done online, providing convenience and accessibility. Despite some costs and potential cyber risks, the benefits of a Demat account far outweigh the drawbacks, making it indispensable for anyone engaged in the stock market. By digitising investments, Demat accounts significantly enhance the efficiency and security of trading and holding securities.

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Standard Disclaimer

Investments in the securities market are subject to market risk, read all related documents carefully before investing.

Research Disclaimer

Broking services offered by Bajaj Financial Securities Limited (Bajaj Broking) | REG OFFICE: Bajaj Auto Limited Complex, Mumbai –Pune Road Akurdi Pune 411035. Corp. Office: Bajaj Broking., 1st Floor, Mantri IT Park, Tower B, Unit No 9 &10, Viman Nagar, Pune, Maharashtra 411014. SEBI Registration No.: INZ000218931 | BSE Cash/F&O/CDS (Member ID:6706) | NSE Cash/F&O/CDS (Member ID: 90177) | DP registration No: IN-DP-418-2019 | CDSL DP No.: 12088600 | NSDL DP No. IN304300 | AMFI Registration No.: ARN –163403.

Website: https://www.bajajbroking.in/

Research Services are offered by Bajaj Financial Securities Limited as Research Analyst under SEBI Registration No.: INH000010043.

Details of Compliance Officer: Ms. Kanti Pal (For Broking/DP/Research) | Email: compliance_sec@bajajfinserv.in/ Compliance_dp@bajajfinserv.in | Contact No.: 020-4857 4486 |

This content is for educational purpose only.

Investment in the securities involves risks, investor should consult his own advisors/consultant to determine the merits and risks of investment.

Frequently asked questions

What is Demat account in simple words?

A Demat account holds shares and securities electronically, eliminating the need for physical certificates. Similar to a bank account for investments, it simplifies managing shares, bonds, mutual funds, and ETFs without the hassle of paper documents.

Is Demat account free?

In many cases, opening a Demat (Dematerialised) account, which is used for holding shares and securities electronically, may involve certain charges. These charges can vary depending on the broker or financial institution you choose, as well as the services and features they offer.

Can we buy shares without Demat account?

No, shares cannot be bought without a Demat account. One must have a Demat account with a Depository Participant (DP) for buying and holding shares in India.

What are the disadvantages of a Demat account?

The disadvantages of a Demat account include:

  • Maintenance fees and transaction charges can accumulate.
  • Vulnerability to cyber threats.
  • Some individuals may struggle with the digital format.
What is difference between Demat account and normal bank account?

A Demat account holds securities like stocks, bonds electronically, while a normal bank account holds cash. Demat accounts facilitate trading in the securities market, while bank accounts handle transactions in cash.

Who cannot open a Demat account?

Individuals who do not meet the following criteria may face restrictions while opening a Demat account:

  • Nationality: Must be Indian.
  • Age: Must be 18 years or above.
  • Requirement of an active bank account.
  • Mandatory documents:
    1. PAN card.
    2. Proof of address (Aadhar card, driving license, passport).
    3. Photograph.
    4. Signature on white paper.
  • Supporting documents: Cancelled cheque or last 3 months’ bank statements.
How can I withdraw money from my Demat account?

To withdraw money from a Demat account, you need to sell your securities through a broker. Upon selling, the proceeds are transferred to your linked bank account.

Why Demat is rejected?

Demat account applications may be rejected due to incomplete documentation, mismatched signatures, or discrepancies in personal details provided.

Can I close my Demat account permanently?

Yes, you can close your Demat account permanently by submitting a closure request form to your Depository Participant (DP). Ensure all securities are either transferred to another account or sold before closure.

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