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A Demat account is a mandatory digital account that electronically stores your shares. To buy or sell stocks, you must link this account to a bank account (for funds) and a trading account (to place orders). This system enables secure, fast (T+1 settlement), and low-cost online trading, making it easy to manage your investments.
This article explains everything you need to know to make investments through a Demat account.
Key Takeaways
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A Demat account electronically stores shares and must be connected to a trading and bank account in order to purchase and sell them online.
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Investors may purchase stocks and sell them online, with trades closing in T+1 days, but they must understand order types and brokerage fees.
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Using a Demat account enables faster settlement, lower costs, greater security, and easier portfolio tracking for all transactions.
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Broker, stock split, bonds, volume, nomination, and DIS are all key concepts for properly managing transactions and avoiding mistakes.
What is a Demat Account?
Earlier, in order to purchase a share in any company, physical share certificates were issued as proof upon payment required for the desired number of shares in the said company.
However, nowadays, no paperwork is required when purchasing shares. The entire process is digital. So, when you buy a certain number of shares in any company of your choice, the shares are transferred to you and stored digitally.
To facilitate this digital transfer, a Demat account is required. Securities are held in electronic form in a Demat account (like cash in a bank account), from which securities may be credited and debited.
Using a Demat Account
In order to buy or sell shares through a demat account, an investor requires a trading account and a stockbroker in addition to a Demat account. A trading account usually represents a single account’s history of buying and selling. After the purchase price is charged before the pay-in date, the broker is responsible for transferring the shares to the investor’s Demat account.
How to Open Demat Account
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Choose a DP (Depository Participant) who will serve as an agent for the depository.
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Complete and submit the account opening form along with other documents.
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Complete the in-person verification, which starts once the you agrees to the terms of the agreement and the charges.
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Log into your account and use it to buy and sell bonds, securities, and derivatives, as well as serve as a storage facility for a stock portfolio.
How To Buy/Sell Shares?
After opening a Demat account for the share market, you can begin trading shares. Before getting into how to buy shares or sell them, it is essential to become familiar with your trading platform's user interface, including its functionalities like market orders, limit orders, cover orders, and bracket orders.
Additionally, it is crucial to understand the brokerage and transaction charges imposed by your broker. Brokers typically charge a brokerage fee for each executed order, which can vary for intraday trading and equity delivery. Intraday trading refers to entering and exiting a trade on the same day, while equity delivery involves holding shares in your account for a later sale.
To sell or buy shares online, you must locate the desired stock on your broker's trading platform and execute a buy or sell order. You should consider choosing a broker with the lowest brokerage charges to minimise trading costs.
Why Is It Important to Use a Demat Account?
A Demat account is required for anyone who wants to trade in the stock market. Without it, acquiring and selling shares online cannot be done since physical share certificates are no longer issued. To open a trading account and initiate transactions, a Demat account serves as the storage and transfer mechanism for all securities.
Using a Demat account guarantees that trades are settled safely and quickly. When you acquire shares, they are automatically deposited to your account within T+1 days, minimising the risks associated with handling actual certificates. A trading account linked to your Demat account allows you to conveniently handle all transactions, whether they be intraday trading or long-term investing.
Furthermore, a Demat account reduces paperwork, saves time, and allows easy monitoring of your portfolio. Investors can track their holdings, dividends, and corporate actions directly through the account. Overall, linking your trading account with a Demat account simplifies trading and enhances transparency.
Advantages of Using a Demat Account for Trading
Before getting into the step-by-step procedure of buying and selling, it's important to grasp the main advantages of utilising a Demat account. These benefits explain why investors choose to link their trading account to a Demat account for more efficient share purchases and sales.
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Seamless Transactions: A Demat account allows purchasing and selling of shares without the need for physical certificates because all of your assets are held electronically. This streamlines stock market transactions and minimises paperwork.
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Flexibility and Accessibility: You get stocks to buy and later sell them from anywhere. Your trading account is connected to your Demat account and can be accessed via desktop or mobile platforms, making online trading more easy.
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Faster Settlement: Using a Demat account leads to faster trade settlement. Whenever you're selling shares, the debit from your account and credit to the buyer are completed rapidly, avoiding delays.
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Reduced Costs: Electronic ownership of shares minimises the additional expenses connected with physical certificates, such as stamp duty and handling fees, making acquiring and selling more cost-effective.
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Security: A Demat account reduces the risks of loss, damage, or fraud associated with paper certificates by offering a safe means to sell shares and keep money.
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Easy Portfolio Tracking: Investors can track all of their shares, dividends, bonuses, and company activities directly in their Demat account, allowing for improved portfolio management.
Important Things to Consider Before Purchasing and Selling Shares Online
Before purchasing and selling shares using a Demat account, investors should:
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Beware of brokerage costs and trading fees, which reduce total profits. Always compare the policies for intraday trading and equity delivery deals.
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Minimise transaction mistakes by understanding the trading platform interface, which includes market orders, limit orders, and other functions. I
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Ensure that the trading account is correctly linked to their Demat and bank accounts to allow for seamless fund transfers.
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Evaluate the tax consequences and transaction settlements.
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Equity delivery deals typically settle within T+1 days. Thus, funds and shares must be accessible to avoid unsuccessful transactions.
These steps enable a seamless online purchase and selling experience while reducing hazards.
How to Purchase Shares Through a Demat Account?
You will be able to purchase shares through a Demat Account once you ensure to follow the below 6 steps:
Get Your PAN Card
Your Permanent Account Number is a legal identification of your income stream along with taxes as well. As per regulations, you are mandated to provide your PAN card in order to make any financial transactions. It is also a key factor to understand your tax liabilities.
Ensure That You Have an Active Bank Account Beforehand
You will not be able to purchase any shares online without a bank account. Transferring of funds to your Demat account will be initiated through your bank account. Ultimately, your trading account links your Demat account with your bank account. In case you plan on selling shares, the settlement will be credited to your Demat account within T+1 days which can further be transferred to your bank account.
Open a Demat Account
In order to purchase shares online, you will need to open a share Demat account with any stockbroker. You would be required to submit a set of documents to initiate the process of opening your Demat account.
The share market Demat account can help you buy, sell, and hold shares for any period of time. You must also remember that you will be allowed to open a Demat account with a DP (Depository participant) who are either registered with NSDL (National Securities Depository Limited) or CDSL (Central Securities Depository Limited) or both of these bodies.
How to Open a Demat Account?
The process of opening a Demat account is pretty straightforward. If you are interested in opening one, you can use the following step-by-step guidelines:
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Selecting a DP or Depository Participant
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Submission of an opening form of Demat account
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Fulfilling your KYC norms- you will require scanned copies of your documents like address proof, income proof, identify proof, and statement of your bank account.
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Clearing your verification process
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The signing of your agreement copies
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Get BO ID number
Documents Required To Open a Demat Account
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Proof of Address such as your Passport, Utility Bills, Driving License, etc.
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Proof of Identity such as your Aadhar Card, Passport, PAN Card, etc.
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PAN Card
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Proof of Income such as a Copy of ITR, Proof of Salary, etc.
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Proof of Bank Account such as a Canceled Cheque
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One to three passport-sized photographs
Also Read more about How To Download an Aadhaar Card? here.
Open a Trading Account
Once you open a Demat account, the next step is to open a trading account. With the trading account, you can buy and sell any share in the stock market. It is necessary for you to have both a Demat account as well as a trading account to purchase stocks.
Purchasing Shares Through Demat Account in the Secondary Market
If you are looking to buy shares in a secondary market, you will definitely need to open a trading account with your broker. So, once you place your trade, your broker will send you a confirmation for the same. Once that has been done, your shares will reflect in your Demat account usually in T+1 days. The remaining process is taken care of by the stockbroker.
If you pay the entire amount without any dues before the pay-in date, it is important for your stockbroker to reiterate that the shares will be transferred to your Demat account. In case of any pending dues from your end, your stockbroker may withhold the transfer of shares.
Purchasing Dematerialised Securities:
Step 1: Choose a broker who can facilitate the purchase of the securities
Step 2: Make a payment to the broker who will then arrange for the payment to the clearing corporation on the pay-in day
Step 3: The securities are credited to the broker’s clearing account on the pay-out day
Step 4: The broker will give instructions to its Depository Participant (DP) to debit the clearing account and credit the same to your account
Step 5: The depository will then confirm the dematerialization of shares to the DP. Once this is done, a credit in the holding of shares will reflect in the investor’s account electronically.
Step 6: You will receive shares in your account. To receive the credit, you will need to give ‘Receipt Instructions‘ to the DP if you did not give standing instructions during the opening of your account
Selling Dematerialised Securities:
Step 1: Choose a CDSL or NSDL registered broker and sell the securities in a stock exchange linked to the exchange.
Step 2: The Depository Participant (DP) needs to be instructed to debit your account with the number of securities sold and credit the broker’s clearing account
Step 3: You need to send the delivery instruction to your Depository Participant (DP) using the delivery instruction slips (however online orders can also be sent via app or web portal etc).
Step 4: Once the request is approved, the share certificates in the physical form will be destroyed and confirmation of dematerialization will be sent to the depository
Step 5: The broker will give instructions to its DP for delivery to the clearing corporation before the pay-in day.
Step 6: You will receive the payment from the broker for the sale of your securities
Is It Possible To Exchange Stocks Without A Demat Account?
Since trading equity requires the distribution of shares, a Demat account is required in order to purchase shares. Buying and selling securities in physical form is complicated. As compared to people exchanging in demat accounts, the number of agents trading in physical shares, as well as the number of investors able to purchase physical shares, is significantly smaller.
It is not necessary for an investor to have a Demat account while trading exchange-traded funds, currency, or derivatives. This is due to the fact that these forms of trading do not require stock distribution and are cash settled.
What Exactly Is Share Allocation, And How Much Do I Need To Do It?
Share allocation enables investors to connect their Demat accounts to their trading accounts, allowing them to see their most recent Demat holdings. All of the shares in a user’s Demat account can be allocated all at once. When a consumer makes a new market or off-market purchase, the shares credited to their Demat account must be allocated using the “Allocate Share” option. You just need to allocate incremental shares as much as you create transactions.
Demat Account Concepts That Are Important To Know
Let us go through some keywords associated with Demat accounts to better understand how they are used:
Power Of Attorney
Account holders may give another individual power of attorney (POA) when required. This POA gives the individual the authority to manage the account on their behalf.
Corporate Actions
Bonus, break, and rights are often announced by companies for the benefit of their investors. The central depository and the different depository members have direct access to information on all existing shareholders. The advantages of each of these activities are immediately visible in the investor’s Demat account.
Investing
A single Demat account can be used to invest in a variety of financial items. Bonds, mutual funds, exchange-traded funds, stocks, and government securities are examples of these instruments. A Demat account can also be used to invest in initial public offerings (IPOs) and systematic investment strategies.
Nomination Facility
At the time of operating a Demat account, individual investors may name any other person as a nominee. This means that in the event of the account holder’s death, all of the account’s holdings are passed to the applicant, preventing a lengthy and inconvenient process.
Technical Terms Related To The Demat Account
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Broker: An intermediary who offers a platform for buying and selling stocks. Brokers charge a broking fee to execute trades through your trading account.
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Stock Split: The split of a single stock into multiple equities, depending on a company-determined ratio. This does not change the total value of your assets, but it does increase the number of shares in your Demat account.
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Bonds: Type of security issued by enterprises or governments. Bonds typically have lower growth rates but give consistent returns and can be stored in a Demat account alongside equities.
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Volume: The total number of shares traded in a given time period. High volume implies active trading, whilst low volume shows little investor interest.
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Nomination: A feature that allows Demat account holders to choose a receiver for their stocks in the case of their death.
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Delivery Instruction Slip (DIS): Form used to instruct your Depository Participant (DP) to debit or transfer shares from your Demat account.
Conclusion
Now that you have a detailed understanding of how to purchase shares through a Demat account, get started right away. If you are yet to open a Demat account, Angel One can help you open one within a very short span of time. You will only be asked to submit minimal documentation and will be able to begin your investment journey soon.
