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Demat is an electronic account which is used to keep eligible scrips in the dematerialised form. In the past, shares, bonds and mutual funds were only traded in physical form. Understandably, dealing with them was time-consuming, and even risky, as revealed by several cases of fraud. The process of dematerialisation of shares was initiated in 1996 wherein physical shares were converted into electronic form by Securities and Exchange Board of India or SEBI. .
Demat Account or dematerialised account provides facility of holding shares and securities in electronic format. During online trading, shares are bought and held in a Demat account, thus facilitating easy trade for the users. A Demat Account holds all the investments an individual makes in shares, government securities, exchange-traded funds, bonds and mutual funds in one place.
Dematerialisation is the process of converting the physical share certificates into electronic form, which is a lot easier to maintain and is accessible from anywhere throughout the world. An investor who wants to trade online needs to open a Demat with a Depository Participant (DP). The purpose of dematerialisation is to eliminate the need for the investor to hold physical share certificates and facilitating a seamless tracking and monitoring of holdings.
A demat account is similar to a bank account. When you buy a share through an intermediary (stockbroker or bank) from a stock market, i.e. the National Stock Exchange or the Bombay Stock Exchange. Then, after clearing through the NSE Clearing Limited or the Indian Clearing Corporation Limited, the particular stock is credited to your demat account.
There are two demat service providers in India – the Central Depository Services Limited (CDSL) and the National Securities Depository Services Limited (NSDL). So, after a stock transaction takes place at the stock exchange, it is cleared by the clearinghouses, and finally, the stock is deposited in the demat account held at any of the depositories.
The following are the types of Demat Accounts
Repatriable funds are deposited in a separate bank account known as the Non-Resident External Account (NRE account). Repatriable funds are those funds which can be transferred abroad. The investments made from these funds are maintained in a The Repatriable Demat account holds the investments made from repatriable funds. On the other hand, non-repatriable funds (funds which cannot be taken/transferred abroad) are deposited in a different bank account known as the Non Resident Ordinary Account (NRO account)
.The Non-repatriable Demat account holds the investments made from non-repatriable funds. Money can easily be transferred from an NRE to an NRO account. However, once the transfer is made, the repatriability is lost and the money cannot be transferred back to the NRE account.
To invest online, one needs a broking account which can be opened by approaching any of the brokerages such as HDFC Securities, ICICI Direct, Axis Direct, Kotak securities, and Zerodha.
These broking firms can either be a discount broker or a service broker. The primary difference between the two is the range of products and services that are offered. A discount broker just carries out an investor’s trading instructions and has equity and derivatives to offer, where as a service broker, in addition to what a discount broker offers, provides seamless investing options for initial public offerings (IPOs), mutual funds, and insurance on its platform. It is the service broker that comes with research reports on various stocks and sectors. Majority of the broking firms are service brokers.
If you are bitten by the returns of IPOs in the recent past, remember that investing in them is not as seamless with discount brokers as it is with full service brokers.
To open a demat account you can contact a depository participant (DP) such as a stockbroker or its channel partners/sub-brokers, commercial bank or financial institutions (FI).
You may need the following documents to open a demat account:
At the time of account opening, you need to fill and duly sign the application form provided by the broker or bank. Usually, it takes up to two weeks to open a demat account.
Some brokers or banks levy a Demat account opening charge while there are others which offer it for free.
Then there is an annual maintenance charge that most brokers/banks levy, however, some brokers waive the annual charge if the transaction volume exceeds a certain threshold.
Based on the number of transactions done through a demat account, the broker or bank may levy a transaction charge every month. Transaction charges vary across the depository participants (banks/brokers) — some may charge at a flat rate as per the number of transactions irrespective of the quantity of scrips while others may charge based on the number of scrips.
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