Demat account (dematerialized account), is a type of electronic account that stores an investor’s physical shares and other securities in an electronic format. Holding physical stocks and securities involves risk as it might get lost, damaged, or torn. A Demat account is used to avoid these risks.
By using a Demat account, shares can be stored, maintained and transferred easily from the comfort of your home with just a click of a mouse. As it reduces paperwork, it is cost-efficient and less time-consuming.
Uses of A Demat Account
A Demat account offers various facilities. Uses of Demat account are listed as below,
- For trading in the share market, you have to open a Demat account. It is easy to access, and various investments such as mutual funds, government securities, equity shares and exchange-traded funds can be maintained using a single Demat account.
- By using the securities in the Demat account as collateral, you can get a loan from the bank.
- Using a Demat Account, you can dematerialize or re-materialize securities into different forms as per your requirements.
- You can use a Demat account for many operations such as trading, investing and controlling other securities through multiple electronic devices.
- When a company releases dividends or refunds, bonus shares, stock split to its investors, all these benefits get deposited to their Demat accounts, automatically.
How to open a Demat Account?
To use a Demat account, you need to have a demat account.
- The first step of opening a Demat account is to select a Depository Participant (DP). A DP acts as an agent for the depository.
- The next step is to fill the account opening form. You need to submit ID proof, address proof, PAN card and a passport size photograph along with the form.
- An in-person verification initiates after the investor accepts the terms of the agreement and the charges.
- The investor gets a client an account number or an ID, password after successful processing, verification of application. This ID is useful to access the Demat account online to buy and sell shares, and other financial instruments.
How Does A Demat Account Operate?
- To operate a Demat account, you need a trading account and a bank account. Without the other two accounts, Demat account is useful in maintaining shares and securities only.
- The trading account is suitable for placing buy and sell orders while trading. The bank account linked with Demat account and trading account helps to transfer money for trading.
- To buy or sell the shares, first, you need to access your trading account using your login ID, passwords. When you request for a buy or sell of a particular share, your DP forwards it to the stock exchange immediately.
- Then the stock exchange looks for the seller or buyer (as per your request) and sends an instruction to the clearance house to debit or credit the requested number of shares from the respective Demat account.
The choice of depository participant, or broker can significantly impact your profits from investing in the stock market. If you choose to open a demat and trading account with a discount broker, it will charge you a flat rate brokerage fee per trade as against the traditional volume-based brokerage fee, which can significantly reduce your brokerage costs.
Disclaimer: Investments in the securities market are subject to market risk, read all the related documents carefully before investing.
