Demat Account is used to store shares you buy in electronic form. Just like your Savings Bank account stores money in electronic form, Demat account holds your shares and other financial securities in paperless electronic form.
The shares you buy are stored with depositories. There are two depositories in India – NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
Before demat accounts came into existence, shares were stored in paper form. Shares certificates were issued to every shareholder, and when he sells it was transferred to the new owner. The whole process was time-consuming.
From 1996 onwards, the process of dematerialisation began, through which paper share certificates were converted into electronic form and stored in demat accounts.
Importance of Demat Accounts
In India, demat accounts are mandatory for trading in stocks. Any investor who wants to buy and sell shares has to open a demat account.
Advantages:
- Today’s world is driven by technology and demat account make it possible to securely handle all transactions online. You can buy and sell shares from anywhere in the world.
- There is no risk of theft, misplacement or damage, like it was in the case of physical share certificates in olden times.
- All your financial instruments like shares, mutual funds, exchange traded funds, preference shares etc can be stored and monitored from one account.
- Demat account saves time and also reduces transaction cost as electronic transfers do not require stamp duty etc.
Disadvantages:
- The older generation who do not know to use mobile phones or computers, might find it difficult to trade. Although the traditional ‘call-your-broker’ facility is still provided by some brokers.
- The ease of buying and selling might encourage people to trade more frequently. When the process was more difficult, decisions were more thoughtful. People bought after a lot of research. The average holding period of shares was much longer as compared to today.
There are 3 things you need to buy and sell shares;
- Bank Account: With any major bank in India.
- Trading Account: To buy and sell shares.
- Demat Account: To store the shares you buy.
Trading and Demat Accounts can be opened with any stock broker like Zerodha, ICICI Direct, HDFC Securities, Sharekhan, Kotak Securities etc. These are the Top 5 brokers in India right now.
Can I have two Demat accounts?
Yes, you can have two or more demat accounts, there is no limit. But you can’t have more than one demat account with one broker.
For example, if you open a demat account with HDFC Securities, then you can’t open your second account with them. You need to go to Zerodha, ICICI or any other registered broker to open your second or third demat account.
Things to know before opening Demat Account:
- Brokerage Charges: It’s the fee you pay every time you buy or sell your shares.
- Annual Charges: Most brokers charge a fixed fee every year for your demat and trading account. Before opening demat account, find out how much the charges would be.
- Trading Platform: Ask them to show a demo of their mobile app and website. See if you are comfortable with the trading interface, you can use YouTube to see how their app looks.
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