Contents
What is a Demat Account?
A Demat account is the short form of a Dematerialized account. It dematerializes your physical securities and allows you to hold on to your financial instruments in an electronic format. Just as a bank account is used to hold your money, a Demat account is used to hold your securities. You can hold the securities such as Shares, Bonds, Mutual Funds, Exchange Traded Funds (ETFs) in a Demat account electronically. Before the Demat account came in, physical share certificates were issued, and the physical share certificates had to be kept in great care so that it does not get ripped off or stolen. So, all these problems ended after the Demat account came in.
History
Before 1996, if anyone wanted to buy or sell shares, the individual or his broker was required to be physically available at the stock exchange. If you desired to buy shares, you had to go to the exchange with the cash, and if you desired to sell shares, you had to go to the exchange with your share certificates. When the buyer and seller’s price matched, you would pay the seller in cash, and the seller would hand over the physical share certificates. The share certificates had to be kept in great care so that it does not get damaged or stolen. The process was very much complicated. Therefore, SEBI introduced the concept of a Demat account to make it easier.
The Demat account was first introduced in 1996. So, if you desire to buy or sell shares in today’s time, you can do so right through your mobile, tablet, or computer. The cash you used to take with you to the stock exchange now available in your trading account and the share certificates you used to carry with you are no longer needed. All these shares are now held in your Demat account in electronic format.
Trading Account
When you open a Demat account, it opens another account with it, which is called a trading account. A trading account is required to buy and sell shares. And the shares bought are kept in the Demat account. Similarly, when you sell shares, those shares are sold out of the Demat account through the trading account. A bank account is required to transfer money from it to the trading account. Therefore, the bank account should be linked with your trading account.
e.g. Let’s say you have Rs 2 lakh in your bank account, and you want to do a transaction of Rs 1,00,000. First, you will need to transfer Rs 1,00,000 from your bank account to your trading account. Then you can buy any share with this Rs 1,00,000. You can do a transaction in shares only through a trading account. But if you want to get those shares, you need a Demat account.
Types of Brokers
There are a lot of stockbrokers available in the market. You can open a Demat account as well as a Trading account with any broker. But in terms of services provided, two types of brokers are working in the market. The first one is a full-service broker, and the second one is a Discount Broker.
1. Full-service broker has their own offices. They deal with all products like Mutual Funds, Bonds, IPO, Portfolio Management Services (PMS), Call on Trade facility, Loans, Stock tips, Research reports, etc. They provide a relationship manager who will help you to solve all your business and technical issues. The annual maintenance charges of full-service brokers are generally high.
2. Discount Brokers have limited offices, and their annual maintenance charges are very less or negligible. They provide more analytical tools and multiple investment options like mutual funds in their platform.
There are two depositories in India which maintain Demat accounts. One is CDSL (Central Depository Services Limited), and the other is NSDL (National Securities Depository Limited).
Documents Required to open a Demat account
You have to provide the following documents to your broker to fulfill KYC’s (Know Your Customer) requirements, which is necessary for opening a Demat account.
- PAN card (Compulsory)
- ID Proof- PAN card, Aadhaar card, Voter Id, Passport, etc.
- Proof of address- Ration card, Driving Licence, Bank Account statement
- Two coloured photographs
- Cancelled cheque
- Proof of Income (for Futures and Options trading) – Six months bank statement, Signed Salary slip, ITR acknowledgment, Form-16
- Signature in a blank paper (for online process)
While opening a Demat account, you have to keep few things in mind. Many charges are hidden, and there are also different terms and conditions, so you have to take care of all these things. Many people are investors in the beginning, but later on, they gradually become traders. Being new in the stock market, they do not have much experience. So, they make many losses during trading, pay more brokerage charges, and take extra margins. When you buy or sell shares, you have to pay a brokerage charge to your brokerage firm or where you have opened your Demat account. Whether you make a profit or loss, you have to pay a brokerage charge while buying and selling shares.
Benefits of a Demat account
- Easy to Hold. The share certificates are exposed to the risk of damage. When you keep the certificates in electronic mode, you do not have to bother about any damage. All your certificates are maintained safely and securely.
- Instant Facility. It provides seamless trading and transfer of shares. You can track and monitor your holdings after every transaction. Once a transaction is carried out, all your shares or securities are automatically updated in your Demat account.
- Lower costs. Physical share certificates attracted paperwork and stamp duty, which in turn increases the cost. Now, with a Demat account, all the costs are reduced as all things are kept electronically.
- Security. Physical shares certificates are always at the risk of forgery, theft, loss, misplacement, etc. But with the paperwork reduction, all these risks were eliminated.
- More Convenience. You don’t have to think much while trading or investing. Just open your laptop or computer and log in to your account and start investing. The amount will be debited instantly, and you will get your securities or shares. And in case of delivery, you will get the shares after T+2 days.
There are six different charges related to the Demat account.
1. Account Opening Charges– To open Demat and trading accounts, brokerage firms charge some fees called account opening charges. The account opening charge is a one-time fee. Due to competition in the market, many brokers offer free account opening.
2. Brokerage fee– Brokerage firms charge a brokerage fee when you buy and sell shares. Different brokerage firms have different brokerage charges. Brokerage charges are both on your buy and sell-side.
For E.g. Suppose a brokerage firm called ABC charges you a brokerage fee of 0.02% for intraday. If you buy shares worth Rs 1 lakh for intraday, you will incur a brokerage charge of 0.02% on the buy side, which is Rs 20. When the value of those shares becomes Rs 1,01,000 on intraday, and when you sell those shares, then you will incur a 0.02% brokerage charge on Rs 1,01000, which is Rs 20.2. In this way, you will incur a brokerage charge of Rs 40.2. GST will be applicable on these brokerage charges, which is currently 18%. After GST, your total brokerage charge will be Rs 47.4.
3. Fund transfer charge– There are different ways to transfer funds to a trading account, such as UPI, Net Banking, Cheque, etc. When you transfer funds through net banking, the brokerage firm charges a small charge called the fund transfer charge, which is generally Rs 7/transaction. Brokerage firms do not charge if funds are transferred through cheques and UPI.
4. Annual Maintenance Charges– Brokerage firms charge an annual maintenance charge on Demat and trading accounts ranging from Rs 150/annum to Rs 900/annum. There are some brokerage firms who charge quarterly if any securities held in your Demat account during that quarter.
5. DP charges– DP charges are applicable only on delivery, and that is only on the sell-side. Different brokerage firms have different DP charges. Generally, DP charges range from Rs 12 to Rs 30.
6. Call & Trade charges– If you place an order by calling your brokerage firm or your Relationship Manager on the phone, then the brokerage firms levy separate charges for call & trade services such as Rs 15, Rs 20, etc., per trade.
Power of Attorney (POA)
Power of Attorney (POA) is a legal document that authorizes the broker to operate your Demat account on behalf of you. Power of Attorney (POA) is required at the time of selling the shares in your Demat Account online. Through POA, you authorize your broker to debit the shares from your Demat account and provide them to the stock exchange. If you decide not to provide the same and want to sell the shares through the offline process, you have to fill and sign the Delivery Instruction Slip (DIS) and mail it to your broker to debit shares from your Demat Account. Power of Attorney is not required in Derivatives, i.e., Future and Options trading or Intraday Trading. It is only required at the time of selling the shares in your Demat Account. The Power of Attorney or POA is voluntary, not mandatory.
Also Read: