9 November, 2022

What Is Demat Account & Its Types?

You might have heard the word 'Demat Account' frequently in the past few years. If you’ve wondered ‘what is a Demat Account’, let’s explain it for you.

A Demat Account is a bit like a bank account for your share certificates and other securities that are held in an electronic format. Demat Account is short for dematerialisation account and makes the process of holding investments like shares, bonds, government securities, Mutual Funds, Insurance and ETFs easier, doing away the hassles of physical handling and maintenance of paper shares and related documents.

To understand Demat Account meaning, let’s use an example. Let’s say you want to purchase the shares of Company X. When you buy those shares, they will have to be transferred in your name. In earlier times, you got physical shares certificates from the exchange with your name on it. This, as you can imagine, involved tonnes of paperwork. Each time a share was bought and sold, a certificate had to be created. To do away with this paperwork, India introduced the Demat Account system in 1996 for trades on NSE.

Today, there’s no paperwork involved, and physical certificates are no longer issued. So when you buy shares of Company X, all you get is an entry in electronic form, in your Demat Account. So this is what is a Demat Account.

Today if you want to trade/invest in the stock market (NSE & BSE) or other securities, having a Demat Account is a must. Your Demat Account number is compulsory for electronic settlements of the trades and transactions you do.

How to get Demat Account

Now that you know what is Demat Account let’s see how you can go about getting one. When you open a Demat Account, you are opening one with a central depository like the National Securities Depository Ltd (NSDL) or the Central Depository Services Ltd (CSDL). These depositories appoint agents called Depository Participants (DP), who act as intermediaries between themselves and investors. Your bank, like for instance HDFC Bank, is a DP, with which you can open a Demat Account. Stockbrokers and financial institutions too are DPs, and you can open a Demat Account with them also.

Just like a bank account holds money, a Demat Account holds your investments in an electronic form, which is easily accessible with a laptop or a smart device and Internet. All you need to have is the unique login ID and password to access it. However, unlike a bank account, your Demat Account need not have a ‘minimum balance’ of any sort.

You can check the websites of any of the depositories to get a list of DPs with whom you can open Demat Account with. The choice of a DP should ideally depend on its annual charges.

Note that you have more than one Demat Account, but not with the same DP. So one PAN card can be linked to multiple Demat and Trading Accounts. Also, make sure to check the eligibility criteria and documents required to for a Demat Account so you can choose accordingly.

Benefits of a Demat Account

There are various benefits of opening a Demat Account and they are as follows:

No paper certificates: - Prior to the existence of Demat Accounts, share used to exist as physical paper certificates. Once you purchased shares, you had to store several paper certificates for the same. Such copies were vulnerable to loss and damage, and also come attached with lengthy transfer processes. Demat Account turned all of it electronic, saving you much hassle.

Ease of Storage: - With a Demat Account you can store as many shares as you need to. This way, you can trade in volumes and keep track of the shares in your account. You can also rely on your Demat Account to execute quick transfer of shares.

Variety of Instruments: - Apart from stock market shares, you can also use your Demat Account to hold multiple assets including mutual funds, Exchange Traded Funds (ETFs), government securities, etc. Thus, with a Demat Account, you can approach your investment plans more holistically and easily build a diverse portfolio.

Easy Access: - Accessing your Demat Account is super easy. You can do so with the help of a smartphone or laptop and manage your investments from anywhere, at any time. A Demat Account truly makes investing for a financially secure future more easy and accessible than it has ever been before.

Nomination: - A Demat Account also comes with a nomination facility. The process of nomination is to be followed as has been prescribed by the depository. In case the investor passes away, the appointed nominee receives the shareholding in the account. This feature enables you to make plans for future eventualities and avoid legal disputes.

Demat Account details

Once your Demat Account is opened, make sure you get the following details from your DP:.

- Demat Account number: It is known as ‘beneficiary ID’ if under CDSL. It is a mix of 16 characters.

- DP ID: The ID is given to the depository participant. This ID makes a part of your Demat Account number.

- POA number: This is part of the Power of Attorney agreement, where an investor permits the stockbroker to operate his/her account as per the given instructions.

You will also receive a unique login ID and password to your Demat and Trading Accounts for online access.

Demat and Trading Accounts

A Demat Account is usually accompanied by a Trading Account, which is required for buying and selling shares on the stock market. HDFC Bank, for example, has a 3 in 1 Account that combines bank accounts like a Savings Account, a Demat Account and a Trading Account.

Sometimes, people are confused between Demat and Trading Accounts. They are not the same. A Demat Account contains the details of the shares and other securities in your name. To purchase and sell shares, you need to open a Trading Account. Many banks and brokers offer Trading Accounts with online trading facilities, which makes it easier for ordinary investors to participate in the stock market.

Types of Demat Accounts

Now that we’ve understood Demat Account definition let’s look at the types of Demat Account. There are mainly three types:

1. Regular Demat Account: This is for Indian citizens who reside in the country.
2. Repatriable Demat Account: This kind of Demat Account is for non-resident Indians (NRIs), which enables money to be transferred abroad. However, this type of Demat Account needs to be linked to a NRE bank account.
3. Non-Repatriable Demat Account: This again is for the NRIs, but with this type of Demat Account, fund transfer abroad is not possible. Also, it has to be linked to an NRO bank account.

Now that you know more about the importance of a Demat Account, do not waste time and open one right away!

Are you looking to open a Demat Account? Click here to get started!

Are you looking for short term investment goals? Click here to know more!

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.