What is Demat Account, its Meaning, Type and Process

What is demat account?

Demat is a short form of the word dematerialization, which refers to the process of converting securities into an electronic form. Before the introduction of the Demat account in 1996, traders had to deal with the inconvenience of using physical copies of share certificates that had to be verified at each point of transaction. Trading was tedious and a slow process owing to the cumbersome process of managing securities. With the introduction of the demat account, these problems were eliminated to a great extent. A Demat account holds all your securities, stocks, shares, bonds, etc. in an electronic format.

What is dematerialisation?

The process of dematerialization involves transferring physical share certificates into electronic form, which is simpler to maintain and available from anywhere in the globe. To be an individual who wishes to trade online, he/she must open a demat account with a Depository Participant (DP). Dematerialization aims to make owning physical share certificates unnecessary for investors while promoting easy tracking and monitoring of holdings.

Demat has fastened the entire process and has stored security certificates in digital format, which eventually helped transform the formerly time-consuming and inconvenient process of issuing share certificates. You can convert paper certificates into digital format once your Demat account is operational by submitting all of your physical securities and a Dematerialisation Request Form (DRF). When you surrender your share certificates, you will get an acknowledgment slip. This is how dematerialization functions.

Importance of Demat Account

A Demat account is important because:

• It is a digitally safe method of holding securities
• It eliminates theft of physical certificates, counterfeiting, loss, and damage
• It enables quick share transfers
• It gets rid of pointless paperwork
• It is easier and quicker to open a Demat account
• It simplifies and expedites the share trading procedure

How does a Demat Account work?

The Depository, the Depository Participant (DP), and the Bank are the three important parties involved in the trading process. The depository is an organization that supports trading and holds all shares and securities in a dematerialized form. Two significant depositories in India are National Securities Depositories Ltd (NSDL) and Central Depositories Services Ltd (CDSL). Either of them will allow you to register your Demat Account.

A depository's agent is a Depositary Participant (DP). They serve as a go-between for the depositary and the investors. A bank, a non-banking financial institution, or a brokerage house could be the DP. To select an appropriate DP, take into account the pricing, service options, and convenience of accessibility. In order to conduct seamless trading, it is often advised to open Demat and Trading Accounts with the same DP. The Bank is the final party involved in the operation of a Demat Account.

To open a Demat account is the first stage of dematerialization. Opening a demat account is extremely simple and easy. Here is the process of opening a demat account:

1. Choose a DP
2. Filling the Dematerialization Request Form
3. Submit the necessary documents for verification
4. Sign the agreement and other important documents, which also include a contract between an investor and the DP
5. Document verification
6. The account gets opened

Different types of demat account

Demat accounts can be of several types depending on an investor’s needs.

1. Regular Demat Account:

The regular account is for any Indian resident willing to open a demat account for trading in securities within India.

Resident citizens of India use regular demat accounts. The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) provide regular demat accounts to individual investors with the help of intermediaries, such as stockbrokers and depository participants (DP).

2. Repatriable Demat Account:

This is for the non-resident Indians who wish to open a demat account for trading in Indian securities. The repatriable version allows a trader to transfer funds to another country. Thus, it would help if you had an association with the NRE (non-resident external) bank account to proceed further with the dealings.

A repatriable demat account provides NRIs with the facility to transfer their wealth overseas.

3. Non-Repatriable Demat Account:

The non-repatriable demat account is specifically for the NRIs (non-resident Indian). The funds in these accounts cannot be transferred to other countries the way it can be done in the repatriable account. To use this type of account, the applicant needs an association with an NRO (non-resident ordinary) bank account.

A non-repatriable demat account is similar to a repatriable demat account, as in it also serves non-resident Indians. However, in this account, NRI does not have the right to transfer his funds abroad.

Additional Read: Features and benefits of a demat Account

Tips to choose the best demat account for you

As an investor, you can purchase securities from the stock markets and store them in your demat account. A demat account will hold these securities in an electronic format until you decide to sell them again. Here are the tips to choose the best demat account:

1. Try to go for a 3-in-1 account

A 3-in-1 account is the one that can act as a demat account, trading account, and banking account. You will need all three accounts to invest in the share market. Although there is no statutory compliance to have all three accounts from a single broker, opting for a 3-in-1 account can ensure a greater degree of convenience.

2. Quick and easy online account opening procedure with competitive brokerage charges

Nowadays, opening an account has been simplified and made easy by a lot of online brokers. Therefore, you can open your demat account at your convenience by choosing the best brokerage charges that fit in your trading requirements. Keep in mind to also give a glance over the services offered and the trading interface, for you to have a seamless trading experience across the platform.

3. It’s better to go with the full-service brokers

It’s better to go with the full-service brokers while opening your demat account since they also provide investment advisory and stock recommendations. On the other hand, discount brokers provide only the trading platform and not the advisory services.

Additional Read: Checklist of Demat Account Charges and Fees

Conclusion

Now that you know what is a demat account and how dematerialization works, you can go ahead and open a demat account for yourself. However, it’s crucial to understand your needs and objectives of opening a demat account and choose the right stockbroker.

With ICICIdirect, you can open a 3-in-1 demat and trading account for free and start investing in the stock markets seamlessly. Plus, you can choose from multiple brokerage plans as per your requirements.

Demat Account FAQs

1. What’s the use of a demat account?

A demat account holds securities in an electronic format, making the overall trading experience easy and secure.

2.  Is a demat account free?

Most brokers provide demat accounts at zero opening charges. However, there will be other charges, such as annual maintenance fees, trading fees, etc.

3. What are the charges of a demat account?

It varies from one stock broker to another. They can charge you up to Rs. 1,000 to open a demat account and then you might have to pay annual maintenance charges. With ICICIdirect, you can open your demat account completely free.

4. How long does it take to open a demat account?

Usually, it should not take more than 48 to 72 hours to open a demat account. Some stockbrokers even allow you to open your demat account online and start investing within a few minutes.

5. Which demat account type is best?

It depends on an investor’s needs and location. Resident citizens of India use regular demat accounts. On the other hand, NRIs can use repatriable or non-repatriable demat accounts based on whether they want to transfer their funds abroad or keep them in India.

6. How to open a demat account?

You can open your demat account online by following a few simple steps:

Step 1 – Select your depository participant (it can be a bank or a stockbroker)

Step 2 – Fill in an online demat account opening form

Step 3 – Upload the required documents

Step 4 – Wait for the completion of the verification process

Step 5 – Get your BO ID number and start using your demat account for share trading

7. Is a demat account safe?

The introduction of demat accounts and electronic trading has made investing safe to a large extent. All the transactions leave an electronic trail that is traceable by regulatory authorities. However, it is wise to do your research and opt for a credible broker/depository participant.

8. Who controls demat account?

You control the demat account yourself.

Hope this article helped you understanding the need, meaning of demat account and the functions of demat account.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  Please note, loans related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.