Demat Account and Why it is necessary?
An account that keeps investments and securities in an electronic or dematerialized form is known as a “dematerialized account,” or “demat account.” It functions similarly to a bank account but is intended for the electronic holding and trading of financial items such as bonds, equities, mutual funds, and government securities. To transact in shares electronically, you need a Demat account. This account contains dematerialized securities in an electronic format. Without a Demat account, an investor cannot trade stocks on the stock market.
Demat account importance:
- Keep track of each transaction.
- Reduce the amount of paperwork to promote simple liquidity.
- Makes transactions easier and faster to complete.
- Offers a safe and secure location for securities storage.
- Eliminates the chance that certificates will be tampered with, falsified, misplaced, or damaged.
- Prevents delays in the process of transferring securities.
Dematerialization of shares
The process of converting financial products, including stocks and bonds, from their physical certificates into an electronic or digital version is known as the dematerialization of shares. Dematerialization, as it relates to securities and investments, is the process of reflecting ownership and transactions in a digital format, hence doing away with the necessity for actual paper documentation.
Features of a Demat Account
These are some key components to help you understand what a demat account entails.-
- Easy to Get to: It provides easy and rapid access to all of your statements and investments through net banking.
- Simple Securities Dematerialization: With the help of the depository participant (DP), you may convert all of your physical certificates to electronic form and vice versa.
- Dividends and Benefits on Stock: It takes use of easy and fast methods for receiving interest, dividends, and refunds. The account is automatically credited with everything. Furthermore, it uses the Electronic Clearing Service (ECS) to update investor accounts with stock splits, bonus issues, rights, public issues, etc.
- Easy Share Transfers: Using a Demat account has greatly sped up and simplified share transfers.
- Share Liquidity: Thanks to Demat Accounts, selling shares has never been simpler, quicker, or more convenient.
Advance Against assets: After opening a Demat account, a person may also ask for a loan against the assets they own in that account. - Advance Against assets: After opening a Demat account, a person may also ask for a loan against the assets they own in it.
- Demat Account Freezing: You can freeze a certain kind or quantity of securities in your Demat account for a predefined amount of time. Eventually, this will stop any debit or credit card payments from going into your account.
How Demat Account works
A Demat Account contains the details of the shares and other securities that are registered in your name. An account must be formed for trading in order to purchase and sell shares. Regular investors can now participate in the stock market more easily because so many banks and brokers provide Trading Accounts with online trading capabilities.
Types of Demat account:
Regular Demat Account: It permits investors to own and trade stock shares and other securities electronically. A regular Demat account must be linked to a trading account in order to engage in activities like Futures and Options. Depending on the service provider, this account has a different annual maintenance charge (AMC). SEBI created the Basic Services Demat Account (BSDA) in response to the requests of individual investors. It makes it more affordable for individuals with small holdings by lowering or eliminating the AMC, depending on the size of the investment.
Repatriable Demat Account: This account type is exclusive to Non-Resident Indian (NRI) investors and facilitates their ability to invest in the Indian stock market as well as move funds outside of India. NRI investors need to link their NRE (Non-Resident External) accounts to the Demat accounts in order to facilitate repatriation. With this account, NRI investors can repatriate up to $1 million USD annually. Additionally, it provides investors in India with the flexibility and ease of sending money to another location.
Non-repatriable Demat Account: Similar to the repatriable Demat Account, the non-repatriable Demat Account is meant for non-resident Indians (NRIs). Nonetheless, it prohibits the transfer of funds outside of India. Instead, the non-repatriable demat account is linked to an NRO (Non-Resident Ordinary) account, where the funds remain in India. It allows non-resident Indians (NRIs) to take part in the nation’s stock market and benefit from economic advancement while keeping their money within the Indian financial system.
Required documents to open:
- Proof of Identity (PoI): includes voter ID, passports, Aadhaar cards, and driver’s licenses.
- Proof of address (PoA): Aadhaar cards, passports, voter IDs, driver’s licenses, recent utility bills (gas, water, and electricity, and bank statements)
- Size of Passport Photos: You must provide two passport-sized photos.
- PAN Card: You need a Permanent Account Number (PAN) card in order to open a Demat account.
- Income Verification (for Derivatives Trading): Income Tax Returns (ITR), Form 16, and Salary Slips
- A voided check or a copy of your bank statement containing the account number and IFSC code are examples of bank account details.
- KYC paperwork: Additional forms supplied by the brokerage company or the Depository Participant (DP) may be included in the Know Your Customer (KYC) paperwork.
How to use a Demat account:
- Access your online Demat account with your client ID or account number.
- You may see all of your holdings in your portfolio, including stocks, bonds, mutual funds, and securities.
- After creating a demat account, you need to get a trading account in order to trade.
- After opening an account, you need to link your Demat, trading, and bank accounts.
- You must submit an order request through your trading account before you can start trading after linking your accounts. Your broker will then connect you with the appropriate trading platform so you can execute your trade.
- Your online order will be handled by the exchange.
- Your Demat account will then be credited or debited based on the transaction you complete, and you will receive a confirmation message via email and SMS.
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