A demat account was introduced a quarter of a century ago to make stock market trading a smooth process. The paper-based trading system hassled traders in the stock market. They needed a new system that guaranteed the safety and security of every trade. A demat account, short for dematerialisation, was like a one-stop solution for many problems in the old system.
Let us see six things about a demat account that you need to know.
What does a demat account do?
A demat account is like your bank account. Your bank account stores all your money safely and securely. When you buy a product online using your bank account, money is debited from your account. When you receive your salary in your bank account, money is credited into your bank account.A demat account is like a bank account for shares and securities. If you want to trade in the stock exchange, you need to open a demat account. This account stores all your shares digitally. The shares are stored in an electronic format. But unlike money in a bank account, when you buy shares, the shares get credited to your demat account. When you sell shares, the shares get debited from your demat account.
How does the demat account work?
The demat account has to be linked to your bank account to enable easy, safe and fast transfer of money during trading. Cash is automatically debited from your bank account when you buy shares. And money is credited to your bank account when you sell shares. Your demat account is also linked to your trading account. Your trading account enables you to buy and sell on any stock exchange. All your trading transactions are recorded in your trading account.So, since your demat and trading accounts are linked, the trade automatically gets recorded in both accounts when you buy and sell shares.
Who is a depository participant, and how do they help with trading?
In India, there are two depositories. The national securities depository Ltd (NSDL) and the Central Depository Services Ltd (CSDL). When you open a demat account, you open a demat account with either of these two depositories.
These depositories appoint depository participants or DPs.They can be a bank, stockbrokers or any financial institution.
What are the types of demat account?
There are three types of demat account
Regular demat account – This is for investors living in India.
Repatriable demat account – This demat account is meant for non-resident Indians (NRIs)who invest in Indian shares and securities. These NRIs can transfer all their earnings from investments to an account abroad.
Non-repatriable demat account – This account is also for NRIs but restricts them from transferring their funds abroad and converting them to foreign currency.
What are the charges for opening a demat account?
For opening a demat account,a depository participant will charge you standard charges. That depends on the type of demat account you open. If you want just a regular account, you might not be charged any money. But if you want an account where the depository participant offers you a variety of investment services, you will have to pay account opening fees. You would also pay for account maintenance annually. You also pay transaction charges every time you sell your shares.
Can you use your shares in your demat account to borrow money?
Demat account holders can now pledge the shares in their account to avail of a loan. The holder need not provide any additional security or collateral except the shares that are going to be pledged. It is an extension of credit, almost like an overdraft facility. You need to log into your demat account and check your eligibility to apply for loans against shares. Once your eligibility is confirmed, you select the scrip of the company and the number of shares you wish to pledge. Once you do so, you are navigated to the national securities depository limited (nsdl) website for confirmation and loan disbursement.
While the demat account will open the world of trading to you, you have to be careful to know about the charges with this account.The trading technology used by this participant needs to conduct trade smoothly and easy. This technology should be easy for you to understand and offer plenty of features.You should also be aware of all the charges that might come along with your demat account. You should compare it with other depository participants to make sure you get the best deal. Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. 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. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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