What is a Demat Account? Meaning, Types & Benefits

If you are serious about your financial freedom and want to allocate your money to stocks, mutual funds, bonds, ETFs, etc., the first step you need to take is to open a demat account with a broker. 

In this blog, we will discuss what a Demat account exactly is, its various benefits, and the process of opening one. 

What is a Demat Account?

Demat account is simply an account where all of your securities, such as shares, ETFs, bonds, etc., are held in digital or electronic format. In this digital world, having a demat account or dematerialized account replaces the old system of shares trading in physical forms.

The government of India realized the need for dematerialization in 1996, as physical share certificates involve massive paperwork and can be stolen. Demat accounts have become game changers for various security holders as they are easy to open online or offline, are trustworthy, and offer a more secure way of trading and investing. The SEBI mandates that a stock market investor have a demat account. 

Documents required to open Demat account

Now that you understand that opening a demat account is a prerequisite for trading or investing in capital markets, you must want to know which documents you would need to open a demat account. The list of documents is as follows:

1. PAN card
2. Proof of Address proof like an Aadhaar Card, driving license, passport, voter ID card, etc.
3. Proof of Income (for transactions in derivatives, futures and options)
4. Proof of Bank Account 
5. Photographs
6. Signature

Process to open a Demat Account

Now that you know what a demat account is and why you as an investor need to open one, you might be wondering how you can open a demat account and begin your trading journey. Opening a demat account is easier and less time-consuming than opening a bank account. Here’s the step-by-step guide that you need to follow:

Step 1 – Select a Depository Participant

The first step is to select a Depository Participant (DP) with whom you want to open your demat account.

Step 2 – Complete the application form

After choosing a DP, you will need to click on “Open demat account” and fill out the form with the required information, such as name, email, contact details, PAN, DOB, etc. 

Step 3 – At this stage, you will receive an OTP to verify your contact details. Enter the OTP and proceed ahead. 

Step 4 – Add your bank account

In this step, you will need to add your bank account details, such as account number, account type, IFSC code, etc., to link your bank with your demat account.

Step 5 – Submit the necessary documents

Upload the scanned copies of the required documents, such as the PAN card, cancelled cheque, Adhaar card, etc.

Step 6 – In-person verification

You will also be required to complete in-person verification using a webcam or smartphone.

Step 7 – E-Sign

DPs provide this facility to applicants to E-sign the Demat account form using their Aadhaar-linked phone number. 

Step 8 – Submit the form

After finishing the above steps, DP verifies your details, activates your demat account, and gives you a confirmation via message or email. You get your demat account number, login credentials, etc., after verification.

Types of Demat Account

There are mainly three types of demat accounts according to the requirements of an investor:

• Regular Demat Account – Regular Demat accounts are meant for investors residing in India. Regular demat accounts are offered by depository participants (DP) with no limit on the number or value of securities you can hold. Investors just need to pay a small annual maintenance charge ranging from Rs. 500 to Rs. 999 to the DP.
  • Basic Service Demat Account – BSDA is a basic form of regular demat account as it imposes low AMC on investors. As per BSDA, if an investor has a holding of less than or equal to Rs. 50,000, he is not liable to pay any AMC, but in case his holdings are between Rs. 50,000 and Rs. 2,00,000, he will be liable to pay a nominal AMC of Rs. 100 annually.  

• Repatriable Demat Account – As opposed to regular demat accounts, repatriable demat accounts are for non-resident Indians who want to invest in the Indian capital market or enable the transfer of funds outside India. The maximum amount you can repatriate is $1 million per year. NRI investors need to link their Non-Resident External (NRE) bank account to their demat account while opening a repatriable demat account.

• Non-Repatriable Demat Account – As the name suggests, non-repatriable demat accounts are also meant for NRIs but it does not allow investors to transfer money received from the sale of securities outside India. Instead, they can transfer their proceeds to other Indian bank accounts. The NRI investor is required to have a Non-Resident Ordinary (NRO) bank account linked with the demat account.

Benefits of a Demat Account

Demat accounts have made the process of buying and selling securities very easy and quick. The frequency of trading and transferring of securities have increased since its implementation. Below are the benefits of having a demat account:

• Easy Access – Investments through demat accounts are very easy. Investors can assess their demat accounts at any time and anywhere.
• Reduced Risk – Before demat accounts were introduced, there were high risks of theft, forgery, loss, and tampering with shares in physical form. Problems like delays, extensive paperwork, and errors have also been eliminated after the introduction of demat accounts.
• Automatic updates related to bonuses, and stock splits – Any events related to your stocks, such as bonus issues, stock splits, or reverse stock splits, are updated automatically.
• Loan Facility – You can obtain secured loans from banks by pledging the securities held in your demat account as collateral.
• Nomination Facility – Demat accounts offer a nomination facility, and in the event of an investor’s demise, all the holdings of the Demat account are transferred to the appointed nominee.

Conclusion

A Demat account is essential for everybody who is planning to invest in the financial markets. It makes the holding and trading of securities easier, safer, and more efficient. There are different types of demat accounts with different benefits. Setting up a demat account is an uncomplicated process, providing a range of benefits to the investors, such as loan facility, reduced risk, and easy access to investments.

Frequently Asked Questions (FAQs)