What is a Demat Account?

Overview

It is obvious to know What is a Demat account? You will need a Demat account when you are about to invest and trade in the stock market. As most of us know that a savings account opened with the banks provides us the facility to keep our funds. We have access to these funds, and we can use them whenever we need them at our convenience. The bank account helps us safely store our hard-earned wealth as it acts as a secure depository for our funds. The Demat account does the same work in the case of our shares and securities in the financial market. It stores the shares and protection of the investors safely in electronic format.

With the help of the Internet, the Demat account has gained popularity. In the previous times, all the work in the financial market needed manual work by the people. This, of course, required a huge amount of manpower. The process was very lengthy. It also led to some problems like human errors, misplacing and damage of important documents, etc. To overcome these difficulties the Securities and Exchange Board of India (SEBI), 1996, decided to introduce the Demat account in the country. The account brought digital solutions to enable all the share market transactions. Its introduction was a kind of revolution as it completely changed the scenario. Almost everything was now digital. 

There are about seven crore Demat account holders in India. Every trader knows the importance of the Demat account and knows that you can not trade in the Indian stock market without it. The market regulator of India, the Securities and Exchange Board of India (SEBI) lays down guidelines for the investors and the companies. According to the rules and regulations set, it is mandatory to have a Demat account to invest in the Indian share market. Some readers might have come across the term Demat account in recent times because of its rising importance in the financial market. Let us discuss every aspect of the Demat account in detail. 

What is Demat Account Meaning?

Demat account definition: Demat stands for dematerialization. It is an account where all the shares and securities get held in the dematerialized form. A Demat account is like a bank account that stores securities.  It stores all the kinds of securities in digital form. Your Demat account gets credited when you buy them from the stock market and debit. Also, a Demat account means all physical shares and securities can be converted into electronic format to get stored in the Demat account. 

A Demat account has helped investors by making trading easily accessible and fast. The trading is quick and doesn’t limit us from trading large shares. 

What is the Dematerialization process?

After the significant step of liberalizing the country's economy, the government of India set out to bring reforms to the financial market. The government of India established an organization under its purview. This was the Securities and Exchange Board of India (SEBI) established in 1992. The organization aimed to function as a regulator for the Indian financial market.  The SEBI started working on the government’s goal of bringing in good reforms in the securities market. So, it introduced the Demat account in the country and provided the facility of dematerializing the securities. The dematerialization process refers to converting the physical paper certificates of shares or securities of investors into the electronic format.  

The process of dematerialization is not a very difficult task. Investors who have their shares as paper certificates can easily get their shares converted into digital form. They just need to contact the organizations known as depository participants and open a Demat account for themselves. After you have your Demat account opened, submit all the physical certificates of securities to the depository participant along with the dematerialization request form (DRF). Before submitting though, deface all the physical certificates. For that, you need to mention “ Surrendered for dematerialization”.  This is a very crucial step. So do not forget to skip it. The conversion of physical certificates makes it quite easy to store, maintain and access them very conveniently.  

The earlier method of manually storing all the data which involved a lot of pen and paperwork was not very convenient. Moreover, there was always the possibility of a number of problems. These included issues of damage or loss of crucial documents such as share certificates etc.  The process of dematerialization resolved most of these issues making them a story of the past. The advent of Demat accounts led to the easy storage and handling of the shares and securities in the digital format. Being everything digital investors can easily view all the information related to all their investments and also manage them from any place.  

How Does a Demat Account Work?

A Demat account is an account where you can store multiple securities like Equity, Government Bonds, Debentures, Sovereign Gold Bond, Exchange Traded Funds, Preference Shares, Treasury bills, Commercial Papers, Certificates of Deposits, Capitals Gains & Tax-Free Bonds, Mutual Funds, etc. When you trade for shares or any other securities in the stock market, they get auto-credited and debited from your Demat account. When an investor purchases an asset, it gets credited into the respective Demat account. When investors sell an asset, it gets debited from his Demat account. The investor who buys the asset’s shares will receive them in his Demat account.  You can access your Demat account from anywhere through the stockbroker’s online portals. 

Participants in the Demat Account Opening Process
According to the Depository Act of 1996, the National Securities Depository Limited (NSDL) was founded in 1996. After NSDL, the Central Depository Services Limited (CSDL) was established in 1999. Together these depositories are responsible for hosting all dematerialized accounts in India.

To open a Demat account, you need to  approach a Depository Participant (DP). DP allows you to register with NSDL or CDSL. As an individual investor, it’s not profitable to become a DP. Instead, it’s better to approach DPs who act as agents.

The process of opening a Demat account is pretty simple. Here are the participants involved in opening a Demat account.

Banks

You would need a savings account to get it linked with your Demat account. The funds will get added and subtracted from this bank account whenever you sell or buy shares, respectively. A Trading account gets used to purchase or sell shares transacted from your Demat account.

Depository Participant (DP)

A depository participant(DP) is a financial organization that enables the investors to open a Demat account.  One cannot open the Demat account directly with the depositories. You need to contact the depository participants for that. A DP can be a bank, a stockbroker, or any Non-Banking Financial Institution also. They got registered with NSDL or CDSL, whom you must visit to open a Demat account.

Depository

The National Securities Depositories Limited (NSDL) and the central depository services limited (CDSL) maintain Demat accounts. They are responsible for keeping all Demat accounts safe. It ensures the safety of all the securities stored in each and every Demat account they have. 

In addition, the DP acts as a link between Depositories and investors. They can change Demat accounts on behalf of the individual investor.

The Process of Opening a Demat account

When you are ready to start your financial journey by investing in the share market, follow some steps to get your Demat account opened. Before opening the Demat account, you first need to choose a good Depository Participant that provides all the facilities to fulfill your requirements. Then, follow the below-mentioned steps to open the Demat account. 

1. First, you need to fill up a Demat account opening form. The depository participant will provide the form to you. Most DPs will also assist you in filling out the form and completing the other steps.

2. Next, you will have to complete the know your customer (KYC) process. The SEBI mandates it for everyone to comply with the KYC norms properly. This provides the basic details like your complete name, date of birth, address, phone number, email id, etc. 

3. Then, submit the relevant documents to your depository participant. Provide the proof of address and the proof of identity. For example, you can submit the registered lease agreement, electricity bill, telephone bill, gas bill, copy of insurance, apartment maintenance bills, etc for address proof. Provide your aadhaar card, voter id, driving license, etc.

4. Now, submit the bank details and the PAN details and your income proof. The bank passbook or your account statement is sufficient for you if asked for bank account proof. You may also need to provide a canceled cheque. Your salary payslips or tax return filings will act as proof of income.

5. After completing the KYC the DP may ask you to come to their branch office for in-person verification. Visit the DP’s office when it instructs you, to complete the process in all respects. Some of the depository participants are now providing online facilities to complete the verification process.

Upon completion of these steps, you will have your Demat account opened very soon. The Depository participant will provide a unique 16-digit number, the client ID assigned to every Demat account. You will also receive the login credentials of your Demat account either on your phone number or via email. Check your email id for any update after the completion of the process.

Benefits/Advantages of opening a Demat account

Let’s now look at some of the Demat account's benefits to the investors. The following points are some of the key ones.

1. The arrival of Demat accounts eliminated the risks associated with the use of paper certificates. The paper certificates were the only means to save the record of ownership of shares before the introduction of Demat accounts. In fact, the record of all the transactions was also in paper receipts. Paper certificates always risk getting misplaced or tampered with, untimely deliveries, transit delays, forgery, etc. Also, the transfer of securities was a lengthy process as all the work involved large paperwork. The Demat account makes the securities available in digital form. Hence. This is a very secure way to store securities. Additionally, as every transaction is now digital, the scope for manual errors reduced hugely.

2. All the information in digital form is easily accessible to investors online. All that the investors need is a smart device such as a computer or a smartphone with an internet connection in it. The information from the Demat account is accessible through both the web-based and the app-based platforms. So one can get the information on desktop computers or laptops as well as through apps on mobile phones. 

3. Investors can store any amount of shares very easily. They need to bother about keeping a number of certificates if they hold a large number of shares. This facility enables the investors to invest and trade in large volumes of securities. Moreover, one can monitor all their investments at a place very easily if he holds them in a Demat account.

4. In case of events like stock splits and bonus issues, the investors get regular updates regarding them. Any change in the number of shares during stock splits gets adjusted automatically. 

5. The Demat account allows for storing many kinds of securities apart from just stocks. These include mutual funds, bonds, exchange-traded funds (ETFs), etc.