What is a demat account?
A demat account or dematerialization account is a virtual locker to hold your shares in an electronic format. SEBI has mandated that shares, mutual funds and other capital market instruments must be held in dematerialised form in what is called a demat account. The demat account does away with having to hold physical share certificates. Shares can be transferred to or from your demat account online. A demat account is opened through a DP or Depository Participant such as a bank, stockbroker, online trading platform etc. No matter where you go, you can access your demat account online.
Trading and investing online has become easier and faster than ever due to the introduction of online accounts that let you place orders and execute trades in a matter of minutes. It also keeps a digital record of your transactions and enables the beneficiary of the account to monitor their securities however often they like. Different DPs offer different opening charges. Some DPs such as banks with whom you already have a savings or current account will allow you to open a demat account with no opening charges.
The institution you choose to open your demat account with becomes your broker by default. Whether they actively participate in your investment journey and their brokerage charges will depend upon the type of broking partner you choose to open your demat account with. The securities in your demat account can only be transacted by you. The DP is merely an intermediary between the NSDL (National Securities Depository Limited) or CDSL (Central Depository Services Limited) and the account holder. The two government regulated central depositories are responsible for tracking your holdings.
Different types of brokers
Deciding where to open your demat account will depend upon the type of services you need from your broker. Broadly, there are two types of brokers. A discount broker and a service broker. A discount broker merely carries out the instructions you give them. They invest in securities or sell, based on your inputs. A service broker on the other hand provides you with options and assists you in making a variety of different trades such as stocks, IPOs, insurance, and financial instruments. If you invest through a service broker, pay attention to the brokerage charges the brokers levy. They may offer a flat pricing plan or a volume-linked plan. A flat pricing plan is a flat rate that is charged on all transactions, regardless of the size or value. A volume-linked plan is a dynamic plan where the commission charges are inversely proportional to the volume of the trade. The higher the value of the trade, the lower the brokerage charges are. Depending on how often you plan to trade and your overall investment strategy, the choice of broker will vary from one investor to the next.
For retail investors who are new to the stock market, opting for a service broker is advisable. However, for seasoned investors with a background in finance, trading and investing a discount broker or investing through a mobile or desktop trading application is a useful channel to invest. No matter which platform you choose to invest with, the DP will ask for a brokerage fee. There are no demat accounts without brokerage charges.
Flow of funds
You need to activate three types of accounts in order to invest in the stock market. A bank account, a trading account, and a demat account. These three accounts should be linked. A trading account is used to execute trades or buy and sell your stocks, shares, commodities etc. The money to carry out purchases and investments comes from your bank account or savings account. Once the shares, bonds, instruments, etc. are purchased, they are credited to your demat account. In case you want to sell or redeem shares or units of a mutual fund, you can place an order to sell through your trading account. The units or shares will be debited from the demat account and the proceeds from the sale are debited in your bank account.
Opening a demat and trading account with an institution you hold a bank account with or opening a demat, trading, and bank account with the same entity makes the process of investing hassle-free.
The entire exercise of setting up a demat account can be done online. The brokerage firm will provide you with an application form and a KYC form and request a power of attorney made in the name of the firm signed by the applicant for settlement of trades and funds on your behalf.
Opening a demat account can be done in a few simple steps. The process has been streamlined and simplified considerably for the sake of the investor and ease of doing business. In a few simple steps, you can open a demat account with a DP of your choice and start investing today.