What is a Demat Account and its Basics

A demat account is a must for trading in stocks and ETFs. Importantly, it does not attract stamp duty.

In the last decade or so, the stock market has moved towards paperless trading. For investors, who used to burdened with reams of stock certificates, a demat account has become a necessity. Not having a depository or demat account has now become the biggest entry barrier to investing in equities. It is no wonder that more and more entities (commodities futures and spot market) are moving to the dematerialised form of trading.

A demat or 'dematerialised' account holds shares in electronic form, thus saving you the bother of holding shares in paper form.

DEPOSITORY FUNCTIONS

A depository is similar to a bank. It holds shares, which belong to investors, in electronic form. The investor has to open an account with the depository, through a Depository Participant. The DP is an intermediary between the depository and the investor. In India, there are two depositories, viz., National Securities Depository and Central Depository Services. A number of banks , brokers and institutions function as DPs.

FACILITIES OFFERED BY DPs

The shares bought and sold by you are reflected in your demat account. Any shares you are holding in paper form can also be dematerialised and maintained by way of electronic credit in your demat account. Recently, stock exchanges have facilitated purchase and sale of mutual fund schemes on the exchange.

The DP, at regular intervals, provides you with an account statement showing the balance of shares in your demat account and transactions during a period. DPs also offer many services such as electronic settlement of trades in stock exchanges, pledging/hypothecation of dematerialised securities against bank loans, nomination facility for demat accounts, etc.

HOW TO OPEN

You can open a Demat account with any bank or with brokers and financial institutions. Usually, banks offer attractive rates for a demat account in case you have your savings account with them. However, if you wish to go for online stock trading, you would find it more convenient to open a DP account and trading account with the same broker or financial institution.

DPs charge annual maintenance fees, transaction charges for debit of securities, fees for pledge of securities and various other charges such as charges for dematerialisation. The fees charged for DP services differ across the industry.

BENEFITS

In the depository system, the ownership and transfer of securities takes place by means of electronic book entries. This provides numerous benefits. Dealing in physical securities is open to risks like theft of stocks, mutilation of certificates and loss of certificates during movements to and from the registrars. This problem does not arise in the depository environment. There is no stamp duty for transfer of shares in electronic form, unlike the physical segment. In the depository environment, once the securities are credited to your account, you become the legal owner of the securities. There is no further need to send it to the company's registrar.

Also, the depository provides for direct credit of non-cash corporate entitlements, like rights and bonus to your account, thereby ensuring faster disbursement and also leading to reduction in brokerage costs. Closing an account: However, if you are one of those who does not use the account, closing it is necessary. For one, there yearly maintenance costs. There is also a threat that dormant account can be used for fraudulent purposes. For the closure, you need to submit an application with the DP. And return all unused delivery instruction slips and pay off all the dues. Remember, a demat account can be closed only if there are no shares in it.

By having a demat account, you will always an opportunity to invest in various asset classes. These include, gold ETFs and commodity futures as well. Many investors are unable to participate in the markets because they don't have one. It's time.