Demat accounts are one of most important accounts you need for investing in shares or electronic holdings. This guide has complete information about what is a demat account, how to open a demat account, which demat account is best.
In the end there is also a list to tell you about best deals available for opening a demat account.
Table of content
- What is a demat account?
- Difference between a demat account and a trading account
- What is a depository?
- What is a depository participant?
- Documents required to open demat account
- Benefits of demat account
A demat account is like a bank account, where you hold your money and you have complete details of your transactions in that account. Similarly, a demat account lets you hold your shares in electronic form.
The reason it is called demat is because it is short form of ‘dematerialised’. Before demat accounts, shares of any company were issued in form of share certificates in physical form. This was phased away with the introduction of the Depositories Act 1996 by SEBI.
With introduction of this act, shares were slowly ‘dematerialised’ from physical of share certificate to electronic form.
In a demat account, securities or shares are held in electronic format. They are debited or credited according to your transactions in trading account.
It eliminates the troubles associated with paper shares.To understand it better, just see how you have to be careful with regards to legal papers related to your real estate assets. If they are held in electronic form like shares, then that would be quite easy to manage.
Before we go in more details, let’s clear one question:-
Demat Account & Trading Account: Same or different?
When you begin your direct entry in stock market, you get to know the terms demat account & trading account. Both are generally mentioned in one line.
But they are not same. The primary difference between them is:
Demat Account: It is an account that allows shareholders/investors to hold their shares in an electronic form.
Trading Account: A trading account is used for transactions in the stock market. You need a trading account for buying and selling shares in the stock market.
Thus, demat account is a holding account and trading account is what allows you to trade in share exchange.
On broad level, their primary function is to hold securities. Their main focus is also to provide safe, useful, reliable and secure depository services.
These Depositories hold the securities in book-entry form. This helps in faster transaction & settlement of shares. It also helps public companies credit dividends directly into shareholders bank account as the details are already with the depository.
Both NSDL & CDSL appoint & authorise their agents, who act on their behalf to open and operate demat accounts. These agents are called Depository Participants. When you buy or sell shares, respective DP credits or debit your account accordingly.
These are intermediaries between you ( the investor ) and your Depository. It can be a bank, broker, financial institution, or custodian acting as an agent of the depository to make its services available to the investors.
Each DP is assigned a unique identification number known as DP-ID. As of 2012, there were 288 DPs of NSDL and 563 DPs of CDSL registered with SEBI. This includes all the above mentioned categories, including your broker.
Documents required to open a Demat Account
Due to the sensitive nature of demat account as it involves all the shareholders interests, the document requirement is nearly equal to what is required for opening a bank account.
Here is the list of documents required for opening a demat account:
- PAN card
- Identity Proof
- Bank account details (A cancelled cheque for capturing MICR)
- Proof of Residence (acceptable documents includes electricity bill, phone bill, ration card, driving license etc.)
- KYC details
These days though, brokers, especially technology driven discount brokers like Upstox and Zerodha provide Aadhar based online sign up. In such sign up, you require little paperwork as you identity is digitally verified. Moreover, they provide zero cost equity investing too.
Benefits of Demat Account
Apart from providing you with electronic holding of shares, there are other benefits of a demat account. Few of them are listed below:
- Reduced paper work for transfer of shares
- No risk of losing or damaging of share certificate(s).
- Reduced transaction cost
- Immediate transaction of shares. There is no transit loss.
- Your personal details are saved at DP level. Hence any change in personal details like change in address is automatically registered with all companies in which you have invested thus eliminating the need to inform them separately
- Eliminates the risk of bad deliveries or forgery with regards to transfer of shares.
And most important is you can hold all your investments: Equities, Mutual Funds, Gold ETFs etc. at one place. Which makes it easy to have a look at overall portfolio.
Can you open multiple demat accounts ?
Yes, you can. Just like you can open multiple bank accounts.
Many investors and market professionals do open multiple demat accounts. They do this for the purpose of having different accounts for different purposes. For example, one account for long term investing and one for short term trading.
Which broker’s demat account is best?
All are equally good. Your demat account is opened with any of the two depositories mentioned above. They both are regulated by same guidelines issued by SEBI. They are heavily monitored with plenty of checks and balances.
The issue that you need to take care of is, that what kind of POA you are giving to your broker. Though most brokers don’t play with investors shares, it is still good idea to stick to reputed brokers for opening your long term investment account.
What works best is that you couple of demat account. One to use for your holding your investments. And other one related to short term holdings.
A word of advice: It feels convenient to hold your demat account through your bank. I would suggest against it. Your finances should be segregated. Banks are for banking needs. They work on that principle. Hence, I have seen that banks provide same services at higher costs as compared to standalone brokers.