What is a Demat account?
Demat is short for ‘dematerialized.’ Dematerialized means that the securities held in a Demat account are electronic in nature. These electronic securities are not only easy to access but also safely stored in an archive that is digital and password protected. It is impossible to trade without creating a Demat account.
Types of Demat account
Fundamentally, there are three different types of Demat accounts available to traders. Both Indian residents and non-residential Indians have access to trading via specific demat accounts mentioned below. These are as follows:
1. Regular Demat account:
This is a Demat account that is recommended to any traders/investors who reside within India. This is the most common Demat account as it is ideal for most individuals who tend to trade in equity shares alone. With a regular demat account, the shares that are bought and sold are stored in electronic form. Keep in mind that if you plan to trade in futures and options, then there isn’t a need to hold a regular Demat account. Futures and options come with a date of expiry and need not be stored in one’s Demat account for the long term.
The Securities and Exchange Board of India has recently introduced a new kind of Demat account known as the Basic Services Demat Account or BSDA. A Basic Services Demat Account is quite similar to a regular demat account. The only difference is that there aren’t any maintenance charges for this kind of account if one’s holdings within this account are ₹50,000 or under. If an investor holds between ₹50,000 and ₹2,00,000 in their BSDA account, a maintenance charge of ₹100 per annum is applied. The idea that launched BSDA was one of financial inclusion so one could aid investors who have yet to participate in markets by choosing one of the types of demat account online.
2. Repatriable Demat account:
Non-resident Indians also have the option to trade/invest in Indian securities and this can be done using a repatriable account. It allows traders to transfer funds abroad. One caveat of getting a repatriable demat account is that one requires a non-resident external bank account with these types of Demat accounts. Such a Demat account requires an associated NRE bank account. Once you become a non-resident India, you need to close the Demat account that you owned as a residential Indian.
Once your account is closed, you can transfer shares to a specific Demat account known as a non-resident ordinary demat (NRO) account. Suppose you plan on selling your shares. In this case, a repatriation restriction comes into play. As per this restriction on repatriation, you have the allowance to repatriate a maximum amount of $1 million per calendar year, which extends from January to December.
3. Non-Repatriable Demat account
It is recommended for non-resident Indians in particular. In this type of demat account online, one’s funds and wealth cannot be transferred across nationalities. Similar to a repatriable demat account, a non-repatriable demat account requires that one’s funds be associated with a non-resident ordinary bank account.
You need to open a Demat account and trading account to hold and buy/sell securities respectively in the stock market. However, you need to be aware of a variety of accounts such as what is BO ID, what is a trading account, what is Demat account and types of Demat account, separate classes of accounts, etc. are a few things that you need to know.
Only trading account or only Demat account
The normal belief is that you need to open a trading account and a Demat account simultaneously. Actually, you can choose to open only one of these accounts. For example, if you want to invest in an IPO, then Demat account alone is sufficient. Once the shares are allotted to you, the shares will be credited to your Demat account. The only catch here is that you cannot sell the shares unless you have a trading account. Hence, you are buying shares purely with a view of holding them for the long term, then Demat account alone is sufficient. On the other, if you only want to trade in futures and options, then you need not open a Demat account. A trading account alone will be sufficient since F & O does not result in delivery. It is only when you want to hold equities that you require a Demat account.
Equity trading account and Commodity trading account
Your equity trading account is sufficient for trading in equities, futures and options. With regards to commodities, it is currently not possible to trade in commodities with your existing equity trading account. You will need a separate commodity trading account which you will have to open with your broker. This is largely due to the fact that commodities were under a different regulator in the past. It is only in the last 2 years that the FMC (Forwards Market Commission) was merged into SEBI, and the commodity market regulation was also brought under SEBI. This could change as the regulator looks to further integrate the equities and commodities segments. It is interesting to note that currency derivatives can be dealt in your existing equity trading account itself.
Online versus Offline trading accounts: 2-in-1 account versus 3-in-1 account
Let us look at the primary classification here. Offline trading accounts are the traditional accounts that do not offer internet trading. You can call up your broker or walk into your broker’s office and trade. The online accounts, on the other hand, offer internet trading. That means you can execute your trades sitting in the comfort of your home or your office using your laptop, PC, or even your smartphone. An online account tends to attract lower brokerage and is also a lot more convenient and flexible for the trader.
Within the ambit of online trading accounts, let us also understand the difference between 2-in-1 accounts and 3-in-1 trading accounts.
- The 2-in-1 trading account basically integrates the trading account and the Demat account. Thus, when you buy shares in your trading account the movement into your Demat account on T+2 day is seamless. Similarly, when you sell shares, the debit to your Demat account on T+1 date is also seamless.
- The 3-in-1 account is offered by brokers that have banking operations within the group. Thus, ICICI Securities, HDFC Securities, Axis Securities, and Kotak Securities are all able to offer 3-in-1 accounts due to their banking interface. While 2-in-1 accounts are a must to ensure a seamless relationship between trading and Demat, the 3-in- 1 is not a major advantage as most broking platforms will allow you to transfer funds almost seamlessly into your trading account.
Discount broking accounts versus full-service trading accounts
This distinction has gained prominence in the last couple of years with the emergence of discount brokers who trade huge volumes at a very low cost. These discount brokers do not offer any research or any add-on advisory services. They just offer plain execution of trades which is why they are able to offer services at a very low brokerage. Similarly, these discount brokers do not offer offline facilities for placing trades except a call-and-trade facility, which is chargeable in most cases.
The full-service model will charge a higher brokerage but comes with a host of services. For example, there is research, short-term calls, advisory desk, and advisors to help you if you get stuck in positions. These are some of the premium services that you will get when you opt for a full-service trading account against a plain vanilla discount broking account. While the trading account enables you to trade on the BSE and the NSE, the commodity trading account enables you to trade on the NCDEX and the MCX. Remember, for commodity trading, you need to open a separate commodity trading account and a separate commodity Demat account.
Now that you have learnt about the various types of demat account, open a demat account with India’s most trusted broker Angel One.