What is Demat Account: Importance, Working & Benefits

A critical tool for maximizing your wealth and safekeeping, Demat accounts make share trading quick and easy. It eliminates the risks and challenges associated with physical share certificates. In India, if you wish to invest in the stock market, it is mandatory to open a Demat account.

Earlier, shares were held in a physical form through share certificates. However, it made the entire process of share trading cumbersome and difficult to carry out at short notice.

The National Securities Depository Limited (NSDL) was established in 1996 to eliminate these limitations. They introduced the concept of Demat accounts, which could be used to electronically store shares and securities of companies. If you own physical shares, you need to convert them to electronic records before using a Demat account. This process is commonly known as Dematerialization.

Importance of Demat account

With a Demat account, you can hold a wide variety of investments such as bonds, equity shares, government securities, mutual funds, and exchange-traded funds (ETFs). Similar to a bank account, a Demat account is either credited or debited each time you buy or sell shares of a company.

It not only eliminates unnecessary paperwork but also helps streamline the process of share trading. All of the Demat accounts in India are maintained by two depositories, namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

The nature of a Demat account is homogenous to a savings bank account. Just like one can store cash in electronic form into the savings account, the investor can store securities into the Demat account of a depository participant (DP) associated with the NSDL or CDSL. When shares or securities are purchased, the Demat account is credited. However, the account is debited when shares or securities are sold. For transacting in equity and securities through your Demat account, it is a prerequisite to link it to your trading and savings account.

Features of Demat account

By opening a Demat account, you can access many useful features.

• Share transfer: You only need to send a duly signed Delivery Instruction Slip (DIS) to your depository participant to transfer your shares.
• Loan collateral: You can pledge the securities you hold in a Demat account and use them to secure a loan from a financial institution.
• Temporary freeze: You can temporarily freeze your Demat account for a specific duration. However, this feature is generally only made available if you hold a specific number of shares in your account.
• Quick transfer of benefits: Best Demat accounts offer a swift transfer of benefits such as dividends, bonus issues of shares, stock splits, interest, and refunds.
• Speed e-facility: NSDL allows you to electronically send instruction slips to your depository participant. This not only makes the entire process faster but also less cumbersome.
• Easier holding: Maintaining physical certificates is cumbersome and risky. Opening a Demat account digitizes the certificates, enabling easier holding and added security.
• Multiple Access Points: Being completely digital, these Demat accounts can be accessed anywhere using any digital device, like computers, mobile phones, or other smart devices.

Benefits of a Demat Account

With a Demat account, you can hold various investments, such as bonds, equity shares, government securities, mutual funds, and exchange-traded funds (ETFs). Like a bank account, a Demat account is either credited or debited each time you buy or sell company shares.

It not only eliminates unnecessary paperwork but also helps streamline the process of share trading. All of the Demat accounts in India are maintained by two depositories, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). The numerous benefits offered by Demat accounts are as follows:

1. Security: It eliminates risks associated with physical certificates, such as theft, loss, or damage.
2. Convenience: Investors can easily access and manage their holdings online, facilitating quick transactions.
3. Cost-Effective: It reduces transaction costs by eliminating paperwork and stamp duties associated with physical shares.
4. Instant Transfers: Securities can be transferred seamlessly, enhancing liquidity and enabling faster trading.
5. Corporate Actions: Dividends and bonuses are automatically credited to the account, simplifying management.

How does a Demat Account work?

• A Demat account facilitates the electronic possession of shares, allowing one to purchase, vend, and control their holdings effortlessly. 
• When you initiate a transaction via your brokerage account associated with your Depository and checking accounts, the Depository Individual forwards the order to the equities market.
• Provided an equivalent request is located, the deal is concluded, subtracting stock from a seller’s account and adding it to the buyer’s. This smooth process transpires regardless of whether the holdings are with different depository institutions.

Types of Demat accounts

In India, there are primarily three types of Demat accounts offered by depository participants.

1. Regular Demat accounts
   These are Dematerialized accounts for Indian residents. If you’re a resident of India dealing with equity trading and investment, a regular Demat account is ideal for you.
2. Repatriable Demat accounts
   This is one of the two types of Demat accounts available for NRIs. A repatriable account allows you to transfer funds abroad if you’re an NRI. You must link this account with a Non-resident External (NRE) bank account to repatriate your funds.
3. Non-repatriable Demat accounts
   If you’re an NRI, you can also open a non-repatriable account. This type of account does not allow you to transfer funds abroad. It must be linked to a Non-resident Ordinary (NRO) bank account.

Documents required for Demat account opening

For the convenient and hassle-free process of opening a Demat account, you must have some essential documents. Here is a compiled list of required documents given below.

• Proof of identity with a photo. For example, an Aadhaar card, PAN card, voter ID card, driving license, etc.
• Proof of residence – Registered lease agreements, driver’s licenses, passports, landline telephone bills, electricity bills, apartment maintenance bills (if applicable), copy insurance, gas bills, etc.
• Proof of bank account – The bank’s passbook or account statement (must be no more than three months old).
• Proof of Income – Payslips or taxes (mandatory for the currency and derivatives segment)

Demat account fees

Several leading depository participants in India offer exceptional services. They charge a certain sum to open these accounts, which may vary for every participant. It makes it difficult for investors to comprehend the nature of services and fees a depository participant charges. To make it easy for you to understand, here’s a brief explanation of the particulars of each service.

When you open a Demat account with IIFL Securities, there are no account opening charges, and the Annual maintenance charge for the first year is also waived off.

Tips to Choose the Best Demat Account for You

Here are some tips for choosing the best Demat account:

• Ensure that the annual maintenance charges are economical, as these are charged regardless of your trading activity. Opt for a Demat account with reasonable fees to avoid high recurring costs.
• The process of opening a Demat account should be straightforward and efficient. A reliable depository participant (DP) can simplify the process using e-KYC, ensuring compliance with SEBI guidelines.
• Choose a Demat account that integrates broking and banking, allowing smooth and cost-effective transactions. This feature simplifies money transfers when buying or selling shares through a single platform.
• Opt for DPs that provide online analytics tailored to your preferred shares and investment habits. Customized insights can help you make informed investment decisions and maximize earnings.
• A shorter TAT for share dematerialization indicates a DP’s efficiency and commitment to customer service, making the investment process smoother.

Conclusion

IIFL Securities’ financial products and services have enriched the lives of over 4 million customers. At the heart of IIFL Securities is an award-winning research team that offers world-class technological solutions. Through a single Demat account opened with IIFL Securities, you can invest in various options, such as IPOs, derivatives, equities, commodities, and more, with daily and weekly reports.