Opening a Demat account has several benefits. Some of these include reduced paperwork, lower transaction settlement time, cost savings, and safe holding of all investments in one place. However, many budding investors find it difficult to understand its technicalities. This is often because many new investors do not have a clear idea about how to operate a Demat account, or how to buy shares using a Demat account. The information below may help beginners as well as experienced investors to understand how to use the Demat account.
What is a Demat account?
Conceptually, a Demat account performs similar functions to that of a bank account. In a bank account, an account holder holds money in the account, and respective entries are made in the passbook. In a Demat account, instead of money, securities are held in electronic form, from which credit and debit of securities take place.
What is the use of Demat account?
Since the turn of the century, SEBI has aggressively propagated the concept of Demat accounts. This is because of a wide variety of reasons which include convenience, security, and cost-effectiveness. Holding securities in dematerialised form eliminates issues pertaining to theft, mutilation, and loss of certificates. In addition, the process of a transaction through a Demat account is also cost-effective and convenient due to the elimination of cumbersome procedures involving stamp papers.
How to use a Demat account?
Using a Demat account is rather straightforward. A Demat account can be opened by an investor by registering with an investment broker or a sub-broker. Access to a Demat account requires an active internet connection and a transaction password which is provided after the successful opening of a Demat account.
The first step in opening a Demat account involves selecting a Depository Participant (DP) who will act as an agent to the depository. This will be followed by filling in the account opening form and submission of identity proof, address proof, PAN card, and a passport size photograph. A detailed description of all the acceptable documents can be found here. Once the investor agrees to the terms of the agreement and the charges, an in-person verification is initiated. Upon successful processing of the application, post verification, a client ID or an account number is provided. This can be used by the investor to access his or her Demat account online. An investor can then use it to buy and sell shares, stocks, and derivatives, and use it as a storehouse for the stock portfolio.
In addition to the Demat account, an investor also needs a trading account and a stockbroker to carry out the purchase or sale of shares. A trading account typically reflects the history of buying and selling in a specific account. It takes T+2 days for credit or debit of shares to be reflected in a Demat account post-execution of trade, and subsequent confirmation from the exchange. It is the duty of the broker to transfer the shares to the Demat account of the investor after the amount for purchase is paid before the pay-in date.
Can I trade shares without a Demat account?
It is mandatory to have a Demat account in order to purchase shares since trading equity involves the delivery of shares. Additionally, it is difficult to buy or sell securities in physical form. The number of agents dealing in physical shares, as well as the number of buyers willing to purchase physical shares, is much lower as compared to the individuals transacting in dematerialised securities.
However, while trading commodities, exchange-traded funds, currency, and derivatives, it is not mandatory for an investor to have a Demat account. This is because these types of trading do not require delivery of stocks and are cash settled.
What is share allocation and how often do I need to allocate shares?
Share allocation allows the investor to link Demat accounts with trading accounts, thus enabling the investor to view the latest Demat holdings. The process of share allocation is extremely simple and can be done within minutes. Users can do a one-time allocation of all the shares present in their Demat account. If the user makes any new market purchase/off-market purchase, the shares credited to their Demat account need to be allocated through the “Allocate Share” option. You need to allocate the incremental shares only as regularly as you make any purchases. How often will you need to do this will depend on your purchasing patterns.
Important terms associated with the Demat account
To further understand the use of Demat accounts, let us discuss some important terms associated with it:
Historically, investments were held in a physical form, which was risky due to loss, theft, or damage. These have now been eliminated as all physical certificates now can be converted into electronic forms and held in the Demat accounts.
If the Demat holdings need to be reconverted into their physical form, individuals can easily rematerialise their securities. A rematerialization request form (RRF) must be submitted to the concerned depository participant (DP) for such reconversion.
Individual investors can identify any other person as a nominee at the time of opening a Demat account. This ensures that in the case of the death of the account holder, all the holdings in the Demat account are transferred in favour of the nominee, thus avoiding a long, cumbersome procedure.
Investors can invest in different financial products using a single Demat account. These instruments include bonds, mutual funds, exchange-traded funds, shares, and government securities. Investments in initial public offerings (IPO) and systematic investment plans are also possible through a Demat account.
Tracking and Monitoring
Traditionally, tracking and monitoring one’s investments under different asset classes was a tedious and a difficult process. With a Demat account, monitoring and tracking all investments is convenient because all details are available in a single location. Facilities like NSDL’s IDeAS allow investors to view transactions and balances online. The process is extremely simple as all one needs to do is register once, either as a Password User or Smart Card/e-Token User. Once this is done, users can track investments regularly by simply logging into the account. This allows the investor to determine the profit and loss he or she is making, which can help him or her make the right investment decisions.
Account holders can receive periodic statements reflecting their current holdings. They can choose physical statements mailed to their registered address or electronic statements to be sent via email.
Receiving refunds, dividends, and interest payments are easier through a Demat account because it is directly linked to the bank savings accounts. This makes it quicker and simpler for companies to transfer funds to all their shareholders, which also helps reduce related expenses.
Organisations often declare bonuses, split, or right issues for the additional benefit of their investors. Information on all current shareholders is directly availed through the central depository and the various depository participants. The benefits associated with any of these actions are directly available in the investor’s Demat account.
If the investor changes his or her address, bank or signature, he or she need not communicate such modifications to all the companies where he or she has invested. Providing these updates to the depository participant for updates ensures the information is made available to all the concerned companies.
Power of Attorney
When required, account holders can provide a power of attorney (POA) to another person. This POA allows the person to operate the account on his or her behalf.
All the investor’s holdings in the Demat account can be transferred to the nominee, survivor, or legal heir, through a transmission form, in case of the investor’s demise through a transmission form.