If the stock market investment is on your mind, opening a Demat account is one of the first steps you will have to take before you could start trading.

So, what is a Demat account and why it is named so?

A Demat account is a shorter and popular name for Dematerialized account. It is an account that is used to hold shares and other financial securities in electronic forms. Dematerialisation means conversion of physical securities such as share certificates and other documents into electronic format.

A Demat account holds assets that have either been dematerialized or bought. Stocks, bonds, IPOs (initial public offerings), mutual funds, exchange-traded funds (ETFs), and commodities are some of the financial assets that a Demat account holds. The Demat accounts are operated by two service providers – the Central Depository Service Limited (CDSL) and the National Securities Depository Services Limited (NSDL). The CDSL and NSDL are the depositories which operate the Demat accounts through their agent or registered stockbroker known as a depository participant or DP.

Why the need for a Demat account?

You cannot invest or trade in the Indian stock market without having a Demat account in your name; you will need it at various stages. Almost all Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) transactions take place in a dematerialized mode only. You essentially need a Demat account for the settlement of trades by delivery or receipt of securities from investors’ accounts. After you execute a buy trade on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), the stock is credited to your Demat account. Similarly, the stock is debited from the Demat account after you sell the stock.

The Demat account also maintains a record of the securities held by the investors in electronic form.

You need a Demat account for transferring shares or other assets electronically from one Demat account to the other.

The benefits of corporate actions are passed on to the investors through the Demat account. The dividends, interest or refunds provided by the corporates are transferred to the investors through their Demat accounts. Corporate actions such as stock split, rights offer shares or bonus issues are updated in the shareholders’ Demat accounts.

Benefiting from IPOs

Investors cannot apply for an IPO (initial public offering) if they do not have a Demat account because, according to the SEBI rules, the shares allotted to you in an IPO are credited to your Demat account.

Demat account benefits and features

A Demat account has multiple features as it has been introduced to keep pace with the rapid changes in the way Indian stock exchanges operate and the growing requirements of an investor.

Here are some of the key Demat account features and benefits:

A safe and convenient way to hold securities

A Demat account holds securities in electronic form, making it easy to store and handle the data. It has eliminated the risk of loss or damage to the physical certificates in storage or during transportation. The hazards such as wrong delivery, fake securities, delays and thefts have also been eliminated. Paperwork for the transfer of securities is no more required.

A Demat account allows you to keep track of your investments and their performance at your convenience. You are not required to remember the record dates of companies you have invested in.

Safe, secure and transparent transactions

The Demat account ensures safe, secure and transparent transactions compared to trading in physical share certificates. It has eliminated the risk of forged and fake share certificates.

Faster and smoother transactions

With a Demat account, the transactions are faster and smoother. The securities are transferred and recorded immediately. It also ensures a quicker and easy discovery of the price of securities.

Reduced cost of transactions

The cost of transactions has significantly reduced with the introduction of a Demat account. There are no handling charges and no stamp duty on the transfer of securities.

Automatic noting of change of address

The change of address is updated quickly and is registered simultaneously with the Depository Participant and the companies from where you buy the securities.

Odd lot problem resolved

Buying and selling of physical certificates were possible only in specified quantities. You did not have the facility of dealing with odd lots or single security. With a Demat account, you can even sell a single share.

Corporate action benefits

A Demat account facilitates automatic and hassle-free transfer of benefits arising out of corporate actions such as paying dividends, refunds, or interest to their investors. In the same way, corporate actions such as stock split, rights offer shares or bonus issues are updated in the shareholders’ Demat accounts.

Availing of loan by pledging the shares

You can pledge the securities held in your Demat account as collateral to secure a loan from your bank. The Demat account has made the process of pledging easier.

You can freeze your Demat account

Investors can voluntarily freeze their Demat accounts for a certain period. This facility comes in handy when the investors want to prevent unexpected debit or credit into their Demat account. During the freeze period, you can continue to benefit from all corporate actions such as paying dividends, bonuses and share splits.

Everything has a price, even Demat accounts

The Depository Participant with whom you open a Demat account levies charges based on the guidelines of the Securities and Exchange Board of India, but the costs differ from DP to DP.

An investor is expected to pay the following charges for opening and maintaining a Demat account.

Account opening charges

The Demat account opening charges are usually nominal, and in some cases, the DPS waive them all together as part of promotional activity. Some companies may not charge you in the account opening year but ask you to pay the following year.

Account maintenance Charges

These are annual charges and vary from DP to DP and depend on your transactions’ value and volume. Here again, some Depository Participants waive the charges to encourage investors to open accounts with them.

Dematerialization and rematerialization charges

The Depository Participants levies charges for dematerialization or rematerialization of shares. Dematerialization means the conversion of physical securities such as share certificates and other documents into electronic format. Rematerialization means the modification of electronic securities back into physical form.

How to reduce charges?

The best way to minimize your Demat account charges is by hunting for a suitable DP. Costs differ from DP to DP, so you should do enough research to select depository participants that charge the least without compromising on the quality of service. There are many DPS that offer fee discounts.

Investors who do not trade heavily can opt for the Basic Services Demat account, also known as BSDA. The charges in this account vary from nil to a nominal fee. The SEBI introduced this account after noticing that many Demat account holders do not use the full services provided to them but continue to pay the high charges. The BSDA offers limited services at a lower cost for retail investors.

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai – 400020, India, Tel No : 022 – 2288 2460, 022 – 2288 2470.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  Investments in securities market are subject to market risks, read all the related documents carefully before investing. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents are solely for informational and educational purpose. The securities quoted are exemplary and are not recommendatory