Do you have a bank account? Mostly, you’d say yes- maybe chances are you even hold multiple bank accounts. But if I ask you whether you have a demat account and know the nuances of opening and operating it? You may not be as confident to answer the same. A demat account is something like a bank account. Only thing is, instead of money held in your bank account, demat holds your securities in form of shares, bonds, or debentures. If you wish to buy and sell securities in the stock market, you first need a demat account. Here’s everything you need to know about a demat account.
What is a demat account and when do you need it?
A dematerialised or demat account is an electronic account where your securities are held, serving as an alternative to physical certificates. In order to buy and sell securities in the Indian stock market, it is necessary for you, as an investor, to open a demat account with a Depository Participant (DP). Depositories are organizations that hold your securities electronically and also facilitate transacting. The two depositories registered with SEBI are National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Depository Participants (DP) act as agents between depositories and investors. In order to avail the services of a depository, you need to go through a DP. DPs could be banks, brokers or any financial institution. The account you need to have with a DP is referred to as a demat account.
For investing, you need to have these three in place - a bank account, a trading account and demat account. A demat account is a close cousin of the trading account, without which the demat account is merely a store for holding securities in digital form. Through a trading account, you can invest in stocks, IPOs, mutual funds and even gold, and hold them in a demat account. Every transaction in the stock exchange begins with transfer funds from your bank savings account to the trading account. From the trading account, which will have its own unique ID, one can trade, ie, buy or sell the securities. The actual credit of shares is shown in the demat account. The demat account is used as a bank where shares bought are deposited, and where shares sold are taken from.
To open a demat account you need to submit proof of identity and address along with a passport size photograph and the account opening form. Only photocopies of the documents are required for submission, but originals are also required for verification. Once the demat account is opened all you need to do is fill in the Demat Request Form (DRM), fill in the appropriate details of the share certificates you hold, and submit it with the physical share receipt. Every share certificate needs a separate DRM form. Once the form is approved, your demat account will automatically be updated to reflect your newly dematerialised shares.
Having trading and demat accounts in one place
Does having a trading and demat account with the same institution help? What happens if it is not with the same entity? For seamless trading, having a 3-in-account helps. For instance, if you open a savings account and demat account with ABC bank and trading account with XYZ broking house, you are required to transfer the amount to the broking house. By the time the amount gets credited, there are chances that you could lose out on good investment opportunities and even on the savings account interest.
Having the account with the same institution also helps if one buys and sells offline using the delivery instruction slip (DIS), which is akin to a cheque in a bank. Signing a DIS can be avoided. If not with same entity, then you will have to sign and send the DIS every time to your DP so they can transfer the shares to the broker. In case there is a delay, then your shares can also get auctioned, causing a probable loss. Also charges become high when you operate with two different entities.
So the next time you invest in the stock market feel free to take cues from this article.