In a demat account, the demat full form is dematerialised because it holds your financial instruments in electronic format. It also facilitates the conversion of physical shares into electronic form. If you want to participate in stock market trading, opening a demat account is a must for all the investments that require you to take delivery of securities.
Why is a demat account needed?
Having a demat account streamlines your investments in the following ways:
Holds securities
In a demat account, you can hold different types of securities like stocks, mutual funds, ETFs (Exchange Traded Funds), corporate bonds, currencies, commodities, and government securities. Therefore, it allows you to hold all your financial investments under one roof. You may also open multiple demat accounts for holding different types of securities.
If you want to know how to create a demat account, you can apply for it online by visiting the website of a broker who offers the required services at a reasonable brokerage.
Safety of holdings
A demat account ensures the safety of your holdings as the securities stored in a demat account are not prone to damages and theft. Moreover, the implementation of robust security features like 2-way authorisation, data encryption, etc. by demat account providers has made it a safe vault for your investments.
Buying/selling shares in odd lots is possible
Buying and selling shares in odd lots is possible when you have a demat account. This was not the case where shares were traded manually in the stock market. As a result, even those who don’t have a huge capital can participate in stock market trading now.
Updates related to IPOs
Companies introduce their IPOs (Initial Public Offerings) to raise funds before listing their stocks in the stock exchange. You can get details of the upcoming IPOs through your demat account. It is also possible to apply for an IPO through a demat account.
Direct credits of corporate actions
Stock companies provide dividends, bonus shares, stock splits, right issues, and other corporate benefits to help their shareholders generate more value from their investments. These corporate actions are credited directly via the demat account.
Types of demat account
There are three main types of demat accounts in India viz. regular demat account, repatriable demat account, and non-repatriable demat account. The regular demat account is for the citizens of India whereas the other two types are meant for NRIs (Non Resident Indians) and PIO (Person of Indian Origin). Though the functionality of all these accounts basically remain the same, the repatriable demat account can only be opened by those who have an NRE (Non Resident External) account. It allows the account holders to transfer the profits earned via trading to a foreign account.
The non-repatriable account does not offer this facility. A person needs to have an NRO (Non-Resident Ordinary) account to open a non-repatriable account. In addition to these three, there is another type of demat account known as BSDA (Basic Services Demat Account). It is also a type of demat account that offers the basic services required for trading in India. However, AMC (Annual Maintenance Charges) is waived off by the BSDA account if your holdings do not exceed Rs. 50,000. If the value of your holdings range between Rs. 50,000 and Rs. 2,00,000, you need to pay a nominal amount as AMC.
How does the demat account work?
To understand how the demat account works, let’s check the working of the main facilities provided by it:
Process of buying and selling of shares
A demat account plays a role in both buying and selling shares. While buying shares, you need to add the required funds to your trading account from your bank account. Once the trade settles successfully, the shares get credited to your demat account in T+2 days. When you sell the shares, they get debited from your demat account and the money reflects in your trading account in T+2 days.
Reflects credits and debits of shares/money
You can download a detailed account statement from your demat account. It not only contains the transactions for all your trading activities but also reflects related to the credits and debits of shares and funds. It is also possible to download a detailed account statement for a specific period.
Process of share transfer
The process of transferring shares from one demat account to another can be completed online these days. You can register for CDSL’s Easiest or NSDL’s Speed-e facility to avail the facility of the online transfer of shares.