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23
Jul,18

Importance of a Demat Account

Importance of a Demat Account

When a company lists on the stock market, its shares become available for trading on the stock exchanges. In the mid-90s, the stock exchanges adopted the electronic system. This means all the trades were conducted electronically. Simply put, you didn't have to go to the counter and place an order physically. You could do it through a computer, which would verify the details, the market price, and process the trade.

For this reason, you need a special account through which you can conduct transactions. This is called the trading account. Without one, you cannot trade in the stock markets. You register for an online trading account with a stockbroker or a firm. Each account comes with an unique Trading Id, which is used for conducting transactions. Besides a trading account, you also need a demat account for all your securities. Let us understand some very basic information about a demat account –

What is a demat account –

A Demat Account is an account that allows investors to hold their shares in an electronic form. Stocks in Demat account remain in dematerialized form. Dematerialization is the process of converting physical shares into electronic format. A demat account number is required to enable electronic settlements of all the trades. Demat account functions like a bank account, where you hold your money and respective entries are done in a bank passbook. In a similar form, securities too are held in electronic form and are debited or credited accordingly. A demat account can be opened with no balance of shares. You can have a zero balance in your account.

Importance of a Demat Account

As mentioned before, besides a trading account, it is also a must for you to have a Demat account for trading in stocks and ETFs(Exchange Traded funds) The important part is that it does not attract stamp duty. The stock market has moved towards paperless trading in the last decade or so.

A Demat account has become a necessity for investors who used to be burdened with reams of stock certificates. More and more entities like the spot market and commodities futures are moving to the dematerialized form of trading. Thus, the biggest entry barrier to investing in equities is not having a Depository or a Demat account. A Demat account holds shares in electronic form and thus saves you the bother of holding shares in paper form.

A Depository holds shares that belong to investors in an electronic form. It is similar to a bank and an investor can open a depository account through a Depository Participant (DP – an intermediary between the depository and the investor). National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the two depositories in India.

The National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL) are both share depositories in India. What they do is just like a bank. While a bank holds your cash and fixed deposits, these depositories hold shares, debentures, bonds etc., for all shareholders in the electronic form.

NSDL was promoted by institutions like IDBI Bank, UTI, NSE and some other institutions, while the CDSL was promoted by institutions like Bombay Stock Exchange, Bank of Baroda, Bank of India, HDFC Bank, etc. NSDL began operations much before CDSL and was the pioneer depository in the country. CDSL was established much after that.

The Demat account will always reflect the shares bought and sold by you. Dematerialize and maintain any shares (that you are holding in paper form) by way of electronic credit in your Demat account. Get to know the balance of shares in your Demat account and periodic transactions with the help of an Account Statement provided by the Depository Participant at regular intervals.

You can open a Demat account with any bank, broker or financial institution. DPs charge transaction charges for the debt of securities, fees for a pledge of securities, annual maintenance fees and charges for dematerialization. By having a Demat account, you will always have an opportunity to invest in various asset classes including commodity futures and gold ETFs. You can close a Demat account if there are no shares in it.

How to trade using the Demat account?

Step 1: Link your Trading and Demat accounts. This way you won’t have to keep supplying your Demat account details for every transaction.

Step 2: Place an order through your online trading account. This could be a market order, a limit or buy order, or an after-market order. If your broker allows you to place orders through the phone, then you will need to supply your trading account details.

Step 3: The exchange will process your order. It will verify the details of the transaction, the market price, the availability of the shares in the market, and so on. It will also check the details of your Demat account that is linked to your trading account. This is especially so in the case of a sell order.

Step 4: Once the order is processed, the shares will be either deposited in or debited from your Demat account.

Can you transfer shares using the Demat account?

Transfer of shares is possible between Demat accounts held with different DPs. You need to fill the Delivery Instruction Slip Book (DIS) and submit the same to your DP for transferring your shares from another Demat account. However, you need to check whether the central depositories are the same or not (CDSL or NSDL). If both of them are different, then you need an Inter-Depository Instruction Slip (Inter DIS). If they are the same, then you need an Intra Depository Instruction Slip (Intra DIS).

Do try to submit that DIS when the market is on. Then, the date of submission of DIS and date of execution of DIS would be the same. Otherwise, there may be a delay. You may also need to pay the broker some charges for the transfer.

Know you DP Account Number

Your Demat Account number is a mix of 16 characters. For CDSL - all characters are numeric and for NSDL, the first 2 characters are IN while the rest are numeric in nature. These 16 characters together are your Demat Account number; when they are broken down in 2 combinations of 8 characters each, the first 8 characters are the DP ID and the last 8 characters are the Client ID respectively.

Documents required to open a DP account:

To open a Demat account, you require certain documents like Proof of Identity, Proof of Address, Passport-sized photographs, etc.

Founded in 2005, ABans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining, Realty and Infrastructure. In a nutshell, Abans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.