What is Demat Account?

A Demat account is a virtual holding account for securities, similar to a savings account held in a bank. It is an online system that makes it easier for investors to purchase and store assets such as shares, debentures, government bonds, mutual funds, etc. The presence of Demat completely digitised the stock trading market and enforced better governance by SEBI. This article will examine the concept of a ‘what is Demat account and how does it work’ by understanding aspects like the definition, its functionalities, benefits, eligibility criteria to open a Demat account, and more.

Demat Account Meaning

When understanding the Demat account meaning, one needs to understand that it is a type of account that allows the investor to hold shares and other securities in electronic or ‘Demat’ form. A Demat account enables the investor to hold and maintain dematerialised stocks, mutual funds, bonds, and exchange-traded funds (ETFs), among others. A Demat account can be opened within minutes online. In compliance with the regulations of SEBI, all the shares and debentures of the listed companies need to be held in the dematerialised form for trading in any stock exchange with effect from 31st March 2019. 

What is Dematerialisation?

Dematerialisation refers to the process of changing paper share certificates into electronic shares. An investor wishing to trade online needs to open a Demat with a Depository Participant (DP). When your Demat account becomes active, you can convert physical stock certificates into electronic ones by presenting all your physical securities as well as a Dematerialisation Request Form (DRF). Additionally, ensure that every hard copy of the certificates should have the statement or the term ‘Surrendered for Dematerialisation’. An acknowledgement slip will be provided to you upon the surrender of the share certificates.

Importance of Demat Account

The following are some reasons listed that address the importance of Demat account:

• Your shares will be kept in a digital record and secured by using means such as encryption and other security passwords. 
• Furthermore, there are no paper certificates, which means that you do not have to get worried if they have been stolen or destroyed by unexpected circumstances.
• All the records are kept electronically; therefore, this cuts back on the amount of time consumed in processing the transactions.
• You can open a Demat account anywhere by uploading documents online. The account opening is done within a few minutes.
• The verification process is quick, and you can start trading soon after account approval. 

Types of Demat Account

Some common types of Demat accounts include:

1. Regular Account & Basic Services Demat Account (BSDA)

   Regular Demat accounts are designed specifically for Indian residents who are involved in investment and equity trading. When you open a regular account, the charges you incur will vary based on your subscription type, the volume of assets in the account, and the specific terms set by the depository and your chosen Depository Participant (DP). This makes regular accounts a suitable choice for those who trade regularly.
   
   

2. Basic Services Demat Account (BSDA)

   The Basic Services Demat Account (BSDA) was introduced by SEBI to accommodate new investors. One of the main features of this account is that there are no maintenance charges if the total value of your holdings is less than Rs. 50,000. For holdings valued between Rs. 50,000 and Rs. 2 lakh, a nominal fee of Rs. 100 applies. This account can be a suitable option for individuals who are just starting their investment journey and have not yet set up a Demat account.
   
   

3. Repatriable (NRI) Demat Account

   This type of Demat account is meant for Non-Resident Indians (NRI) who want to make investments in the Indian stock market. It enables NRIs to participate in the Indian stock market and also manage their investments in India, such as stocks, mutual funds, or any other allowed instruments. 
   
   

4. Non-repatriable Demat Account

   This is similar to a repatriable Demat account and is also for NRIs. But this account doesn’t allow you to transfer funds out of the country. This one has to be linked to a Non-resident Ordinary (NRO) bank account. 

How Does Demat Account Work?

The following breakdown explains how a Demat account works.

• Trading with a Demat account starts by linking it to your trading account and bank account.
• When you place an order to buy shares, the system checks your account balance and share availability at current market prices.
• Then the system processes your order and adds the purchased shares to your holdings statement.
• To sell shares from your Demat account, you need to submit the stock details, after which the shares are removed from your account and funds are added to your Demat account.

Features of Demat Account

Some of the features of the Demat account include: 

• Easy Transfers: With a Demat account, the process of transferring shares from one person to another is made easy and fast. 
• Fast Access: The Demat account gives you the added advantage of logging in to check for all your investments and account statements at any time.
• Automatic Updates: The account adds amounts, such as dividends or interest payments, automatically.
• Security Control: It is possible to freeze certain shares or certain amounts in an account for a while. This is done to avoid any unwanted transfers and protect the investments made.
• Quick Selling: It is easy and quite fast to sell the shares anytime and receive payment faster.

Eligibility Criteria To Open a Demat Account

To open a Demat account in India, you need to meet basic eligibility requirements and submit specific documents.

• You must be over the age of 18 and hold a valid bank account.
• One has to first obtain an account opening form, which is available at any of the banks or brokers of one’s choice.
• Other than that, possession of a PAN card is required, as it helps in linking all the financial activities of a person.
• Additional identification documents include an Aadhaar card, passport, ration card, rent agreement, salary slips, and income tax returns. utility bills and a valid driver’s license.
• Recent passport-sized photographs are required to complete your application.

How to Open a Demat Account?

Opening a Demat account is an easy process. The following is how you can open a Demat account:

• Step 1: Select a Depository Participant (DP)
  You first need to choose a DP of your choice. Almost every bank and several broking services act as DP, which you can select from

• Step 2: Fill in the Required Account Opening Form
  To initiate the process of opening a Demat account, you are required to fill out an account opening form. This form will collect essential basic details from you.

• Step 3: Document Submission
  You'll need to provide copies of documents for verification, which include proof of income, identity, address, an active bank account, and a passport-sized photograph.

• Step 4: Signing of Agreement
  You will be given an agreement, which is a standardised agreement that contains the rules and regulations, charges, and any terms and conditions associated with the Depository Participant. 

• Step 5: Verification Process
  A member from DP will check additional documents you've submitted as part of your application.

• Step 6: Activation of Demat account
  Once the documents are checked and verified, the Demat account will be activated, and the Demat account number and ID will be provided. One can easily access their Demat account online using these details.

Who Can Open a Demat Account?

A Demat account may also be made in the name of a minor but with the condition that the minor's account is supervised by a legal guardian. This is done to ensure the proper and safe utilisation of the account. Eligibility is open to both resident Indians and non-resident Indians (NRIs). This means whether people are residents of India or Indians residing abroad, anyone is free to open a Demat account. These accounts are also allowed to be opened by businesses, trusts, Hindu Undivided Families (HUF), and other registered entities. 

Benefits of Demat Account

The following is the breakdown of some benefits of the Demat account:

1. Document Security: The Demat account ensures that all investment certificates will be stored electronically, thus reducing the risks associated with handling paper documents.
2. Effective Transfer System: The account allows for quick and easy transfer of securities in the course of trading enclosed with portfolio management facilities.
3. Automated Processing: It enables real-time incorporation of actions of the organisations, such as bonus shares and stock split events, in an investor record system.
4. Remote Availability: The Demat account provides uninterrupted access to the client’s balance and trading services over safe internet portals.
5. Succession Issues: Establishes clear criteria for nomination while ensuring that the transfer of securities in the depository follows the policies.

This modern investment management system greatly improves both the effectiveness and safety of operations as compared to passive paper-based certification methods.

Conclusion

The introduction of Demat accounts has significantly changed the outlook towards investment by switching traditional trading, which relied on paper, to a more secure digital process. This new approach provides investors with an all-rounded service when it comes to the management of their financial assets. Additionally, the range of investment options, from stocks to government bonds, offered by the system is indicative of its capacity to serve different types of investment requirements. This simple and efficient procedure defines the function of the Demat account. All these aspects make Demat accounts essential in ensuring that investment activities are practised within a safe and clear environment.