How Does a Demat Account Work?
The stock market has witnessed a fascinating evolution. From close to a hundred years of traders ardently shouting on the trading floors to buy and sell shares, the capital market has become more accessible to investors with the introduction of a demat account in India.
It was the National Stock Exchange (NSE) that changed the capital market forever in 1996 by introducing dematerialisation of shares where the physical shares of an individual were converted and stored into an electronic format in a demat account. Today, a demat account online not only holds shares and securities but also stores other financial commodities such as equity, bonds, government securities, mutual funds, etc.
Let us explore in greater detail what a demat account is and how a demat account works.
What is a Demat Account?
For ease of understanding, think of a demat account as a bank account. Where a bank account holds your money, a demat account online holds the financial commodities of the capital market. Having a demat account online enables a swift, convenient, and hassle-free trade and transfer of shares.
Formerly, stocks and securities were solely available as physical certificates, which made transactions and trading both cumbersome and insecure. However, with a demat account online, the theft, damage, and investors scammed with being sold fake certificates was done away with.
In 2019, the Securities and Exchange Board of India mandated having a demat account in India for any investor who wished to trade in the stock market. While this does not mean that one cannot hold physical shares, it only necessitates having a demat account online to sell and transfer shares.
This step was essentially taken to enhance the convenience and facilitate safer transactions while buying, selling, and transferring the shares of a company.
Benefits of Having a Demat Account in India
In addition to providing a safe entry ticket into the capital market, a demat account also acts as a safe deposit of your savings and financial commodities. Here are some of the most important benefits of having a demat account online:
- Trading Account:Your demat account can only hold your shares and securities. For trading and selling these financial assets, the investor needs to have a trading account. A demat account in India is only meant to hold the shares securely.
- Bank Account:Your demat and trading accounts are linked to your bank account. To buy and sell the shares, you will have to transfer money from your bank account to your trading account. The money received after transactions is credited to the same bank account.
When you open a demat account, you get linked to a trading account with a unique ID and password to access these from the convenience of your home. To buy or sell any shares, you need to login into your trading account, which is linked to your bank account. When you input a buy or sell request into your trading account, your depository participant immediately forwards this request to the stock exchange.
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The registered stockbroker of a depository (either the NSDL or the CDSL) is called a depository participant (DP). A depository is an organisation that holds the securities of an investor through a depository participant. A DP is an agent who acts as a mediator between the depository and the investor. DP could be a bank, a registered individual broker, or another financial institution.
To encourage participation in the stock market, the process of opening a demat account online is both swift and easy. Here are the steps to open a demat account: -
- Choose a trustworthy DP with whom you would open a demat account.
- Fill the account opening form with the relevant details.
- Upload your KYC documents which include the proofs of income, address, and identification.
- Once the process of verification of your documents is complete, you will be provided with your unique customer ID to access your demat account online.
The common charges for the demat account include:
- Account Opening Charges
- Account Maintenance Charges (AMC)
- Dematerialisation and Rematerialisation charges