Personal Finance

What is a Demat Account?6 min read

February 14, 2021 5 min read

What is a Demat Account?6 min read

Reading Time: 5 minutes

Demat account is an account that provides the facility to hold shares and securities in electronic format. In India, this concept was introduced in the year 1996 as an alternative to physical share certificates.

These accounts can also be used to create a portfolio of one’s equity shares, ETFs, bonds, debt securities, mutual funds, and government securities among others. In India, possession of a Demat account is mandatory if you wish to invest in the stock market.

Demat account facilitates the process of converting your physical share certificates into electronic format. This conversion process is commonly known as “dematerialization”. Similar to a bank account, a Demat account is either credited or debited every time you buy or sell shares of a listed company. It is eliminating the need for holding physical shares and facilitating easy trade for the users, promoting seamless tracking and monitoring of holdings during online trading.

Depository and Depository Participants

A depository is an organization or entity that helps store financial assets electronically, so investors and traders can buy, sell or hold them. In India, there are two primary entities that are responsible for maintaining all of the Demat accounts in the country, which are as follows:

Depository: National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are two depositories that manage the financial portfolio of Demat account investors.

Depository Participants: Several commercial banks and brokerage agencies that act as intermediaries between investors and depositories are known as depository participants.

How Does a Demat Account work?

The working of a Demat account is complemented by two other accounts, your bank account, and your trading account. In the share market, buying of stocks can be done only through a trading account. Meanwhile, a Demat account is used to hold the shares bought through the trading account. Here is the process that will explain to you exactly how a Demat account works:

  • When you buy or sell a particular share, you first need to login to your trading account, which is also linked to your bank account.
  • When a ‘buy’ or ‘sell’ order request is placed in the trading account for a specific stock, your Depository Participant (DP) forwards this to the stock exchange immediately.
  • If your request is to buy, then the stock exchange looks for a seller who wants to sell the same quantity of shares and sends an order to clearance houses.
  • The clearance houses then settle the trade by debiting a particular number of shares from the seller’s Demat account and crediting it to the buyer’s Demat account.

Types of Demat Account

There are mainly three types of Demat accounts offered by depository participants. Depending on your residential status, you can opt for the right kind of account for your investment and trading purposes, as explained below:

Regular Demat accounts – All residing Indian citizens can open a regular Demat account to deal with equity trading and investment in an electronic format.

Repatriable Demat accounts – A repatriable Demat account can be opened by non-resident Indians to transfer money from overseas, provided it is linked to a Non-Resident External (NRE) bank account.

Non-repatriable Demat accounts – Non-repatriable accounts are also meant for NRIs; however, these accounts cannot be used to transfer funds from abroad. An individual has to link a Non-Resident Ordinary (NRO) bank account to own and operate this type of Demat account.

Features & Benefits of Opening a Demat Account

Investors who opt to open a Demat account can enjoy several benefits. Here are some of the most common benefits:

  • Demat accounts eliminate the risk of damage, misplacement, forgery or theft of physical shares.
  • The electronic system is also considerably simpler and can easily do seamless transactions in much less time.
  • You can easily merge your bank accounts with Demat accounts for the facilitation of electronic fund transfer.
  • If you have registered for a net banking facility, you can access your Demat account in a remote location as well.
  • Facilities offered by Demat Account

Here are Some Facilities That You Can Avail Through Demat Account

  • With the help of Delivery Instruction Slip, you can easily transfer your shares to another individual in a hassle-free manner.
  • You can also avail of loan facilities from financial institutions against the security of shares kept in your Demat Account.
  • Automatic updation of benefits associated with the shares including dividend, refunds, interest, stock split, rights issue, bonus shares, etc. gets automatically updated in this Demat account, you can thus easily avail it.
  • If you hold a specific quantity of shares or other investments, you can freeze your Demat account for a certain period of time to prevent any unwanted transactions.
  • You can access your Demat account using a desktop, laptop or smartphone from anywhere around the world.

Eligibility Criteria to Open a Demat Account

You can open a Demat account if you fulfill the eligibility criteria mentioned below:

  • Any residential or non-residential Indian can open a Demat account through a depository participant.
  • A Demat account can also be opened in the name of a minor, provided a legal guardian monitors it.
  • Demat accounts can also be opened jointly with a maximum of three account holders, including the main account holder.

Documents Required to Open a Demat Account

Before providing the required documents, you should ensure that the papers are valid as of the submission date and that they haven’t crossed the expiry date. Here is an important list of documents that you require to open a Demat account:

  • Proof of Income: ITR acknowledgment slip submitted to Income Tax Department, Salary Slip or Form 16, statement of Demat account holdings with eligible depository participant, latest bank statement of previous six months – all self-attested.
  • Proof of Identity: PAN Card, aadhaar card, voter ID card, driving license, passport, identity card issued by central or state government, public financial institutions, bar council, and other professional bodies.
  • Proof of Address: Passport, voter’s identity card, ration card, driving license, utility bills such as telephone or electricity bill, bank passbook, etc.
  • A passport-sized photograph.

Steps to Open a Demat account on Paytm Money

  • Download Paytm Money App
  • Add Pan Card details and submit successfully.
  • Now submit an address proof for which you have to add Aadhar Card details.
  • Submit your bank details, for adding and withdrawing funds from the Demat account.
  • Give an e-signature for AOF (account opening form) and you are done.

After submitting all these necessary details, Paytm Money’s KYC team will take care of further proceedings to open a Demat account.

Once the KYC process is done and your Demat account is in place, you can officially start investing in equities.

Summing Up

Before Demat, the securities investment process was too lengthy and time consuming with heavy paperwork. Managing all the paper securities before 1996 was costly and burdensome. Additionally, there were risk factors associated with it, such as theft and physical damage.

Demat accounts have made the overall trading experience more accessible and less time-consuming. Also, most importantly, it makes buying and selling securities safer and more secure. However, before opening a Demat account, understanding your requirements and objectives is a good practice.