A Demat account is an acronym for Dematerialization Account which is used for holding physical share certificates in electronic form. As per the SEBI guidelines, a Demat account is mandatory for executing all share market trades. Apart from shares, a Demat account holds other securities like mutual funds, debentures, gold bonds, ETFs, etc too in digital format.
National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the apex bodies of India that handle dematerialized securities floating in the Indian Capital markets.
Now we will examine the role of a Demat account exclusively for the share market.
Demat Account Meaning for the share market
Online trading in equity markets is impossible without a Demat account. Just like banks hold your money, Demat accounts hold your securities. It is essential for trading or holding shares on a delivery basis.
A Demat Account has the following benefits:-
Eliminates stamp duty requirement for transfer of shares.
Facilitates quick share transfer.
Eliminates bad deliveries due to damage or mutilation of physical share certificates
Safeguards share certificates from the risk of loss or theft.
Ensures faster settlement of corporate actions like rights issues, bonus issues, dividend declaration, etc.
Is very convenient as online share trades can be executed with a mere click of the mouse.
Has an electronic book-entry system that allows you to pull out Demat account statements periodically just like you can access bank account statements anytime and anywhere.
Provides nomination facilities.
Has a very simple procedure for the transfer of an account to your nominee/beneficiary in the event of your demise.
Dematerialized securities are TDS (Tax Deducted at Source) exempt.
Allows you to participate in Initial Public Offerings (IPO). When a company floats shares for the first time in the market, it is unlisted. You can buy shares in an IPO only if you have a Demat Account.
Allows you to invest in the share market with zero balance.
The process of open a Demat account is very straightforward. The last few years have seen phenomenal growth in the number of Depository Participants (DPs) / Brokerage houses providing Demat Account Services.
The following documents are needed to open a Demat account:-
Identity and address proof (Aadhar Card, Passport, Driving license, etc)
Bank Account details
Income proof for engaging in derivative trading.
Passport size photographs. Usually, you will need 3 copies.
Most of the DPs will allow you to open a Demat account online free of cost. They offer a lot of subscription plans that will significantly lower your brokerage charges. Visit the websites of your prospective DPs for more details.
Apart from nominal brokerage charges for executing trades, you also have to pay Annual Maintenance Charges towards your Demat account. Brokerage Houses will charge you for some other services too and the pricing structures are not standard for all DPs.
You need a trading account linked to your Demat account to buy/sell in the secondary markets. When you execute a share purchase transaction from your trading account, the shares will be credited to your Demat Account on a T+2 basis (Two days after the transaction date). Similarly, when you execute a share sale transaction, shares are debited from your Demat account within 24 hours.
If your Demat Account remains unused for a prolonged time period, then your account will be frozen by your DP and you need to complete the KYC formalities again.
So these are the salient features of a Demat Account.