This article explains everything you need to know in order to make investments through a Demat account.
What is a demat account?
Earlier, in order to purchase a share in any company, physical shares certificates were issued as proof upon payment required for the desired number of shares in the said company. However, nowadays no paperwork is involved when it comes to purchasing shares. The entire process is digital. So, when you purchase a certain number of shares from any company of your choice, the shares would be transferred to you as well as stored digitally. To facilitate this digital transfer, a Demat account is required. Securities are kept in electronic form in a Demat account (like cash in a bank account), from which credit and debit of securities may be made.
Using a demat account
Choosing a DP (Depository Participant) who will serve as an agent for the depository is the first step in opening a Demat account. The account opening form must be completed, as well as other documents. In-person verification is started once the investor agrees to the terms of the agreement and the charges. The investor will use this to log into his or her account. It can then be used to buy and sell bonds, securities, and derivatives, as well as serve as a storage facility for a stock portfolio.
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 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+2 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:
– Selecting a DP or Depository Participant
– Submission of an opening form of Demat account
– 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.
– Clearing your verification process
– The signing of your agreement copies
– Get BO ID number
Documents required to open a Demat Account
- Proof of Address such as your Passport, Utility Bills, Driving License, etc.
- Proof of Identity such as your Aadhar Card, Passport, PAN Card, etc.
- PAN Card
- Proof of Income such as a Copy of ITR, Proof of Salary, etc.
- Proof of Bank Account such as a Canceled Cheque
- One to three passport-sized photographs
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.
Get your UIN (Unique Identification Number)
Finally, get your UIN. In order to create a database of all the individuals who participate in the stock market, SEBI has mandated unique identification numbers for every investor and trader. However, you will require a UIN only if you are trading with a capital of Rs. 1 Lakh or more.
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+2 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 broker and sell the securities in a stock exchange linked to the NSDL (National Securities Depository Limited)
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
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.
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.
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.
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.
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.