Understanding how a demat account functions

A Demat account is very similar to a bank account. In bank accounts you electronically hold money, whereas in Demat accounts you electronically hold shares. All buying and selling of shares happens through a Demat account. The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading above 500 shares.

With growing financial awareness, more and more people now want to dabble in the share market. To do this, one should understand the basic requirements to trade in shares.

A company enlisted in a stock exchange, is under obligation to offer the securities in both physical and dematerialised mode. As the name suggests physical securities mean actual certificates giving information about the shares of a company owned by a person. In the same manner, Dematerialisation is the process of converting physical shares (share certificates) into an electronic form. Shares once converted into dematerialised form are held in a Demat account. Today, almost all of the shares trading happens using the Demat mode of shares.

What is a Demat Account?

A Demat account is very similar to a bank account. In bank accounts you electronically hold money, whereas in Demat accounts you electronically hold shares. All buying and selling of shares happens through a Demat account. The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading above 500 shares.

Why to use such an exclusive account?

By using a Demat account, you need not be worried about mutilated share certificates, postal delays, and counterfeit shares. Demat account is a safe and convenient means of holding securities just like a bank account is for funds.

What are the features and benefits of a Demat account?

As opposed to the earlier form of dealing in physical certificates with delays in transaction, holding and trading in Demat form has the following benefits:

• Settlement of Securities traded on the exchanges as well as off market transactions
• Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates, are eliminated
• Shorter settlements thereby enhancing liquidity
• Pledging of Securities
• Shares allotted in public issues are directly credited into demat account of the applicants in quick time
• Auto Credit of Rights / Bonus / Public Issues / Dividend credit through ECS
• Auto Credit of Public Issue refunds to the bank account
• No stamp duty on transfer of securities held in Demat form (as against 0.5 per cent payable on physical shares)
• Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time
• Change of address, Signature, Dividend Mandate, registration of power of attorney, transmission etc. can be effected across companies held in Demat form by a single instruction to the Depository Participant (DP)
• Holding / Transaction details through Internet / email

What steps does on need to take to open a Demat account?

As majority of shares trading happens through a Demat account, it is imperative that an individual dealing in shares has such an account. The minimum age for opening a Demat account is 18 years. To open a Demat account, you must:

1. Choose a Depository Participant or DP (A Depository Participant can be a financial organization like banks, brokers, financial institutions, custodians, etc., acting as an agent of the Depository to make its services available to the investors)
2. Fill up an account opening form provided by DP, attach relevant documents, and sign an agreement with DP in a standard format prescribed by the depository
3. The DP provides the investor with a copy of the agreement and schedule of charges for his future reference
4. DP opens the account and provides the investor with a unique account number, also known as Beneficiary Owner Identification Number (BO ID)

Are there any important things that one must remember about Demat accounts?

There are some things that you must know remember about Demat accounts:

• Pan card is mandatory for opening a Demat account (effective from April 01, 2006)
• Charges applicable (vary from DP to DP):
  • Account Opening Fee
  • Annual Maintenance Fee
  • Custodian Fee
  • Transaction Fee
• Similar to a bank account a Demat account may be closed after a period of inactivity. Check with the DP about the period and the charges associated with reactivating it.