What is a Demat account?
When a share is bought, a share certificate would be given to the buyer as proof of their ownership. The share certificate serves as the document that entitles the buyer as the owner of the shares of a company. Prior to 1996, the share certificates were in a paper format and were converted to a digital form in 1996. The process of conversion known as Dematerialization, often abbreviated as DEMAT, in which an investor’s physical investment securities and certificates such as shares, ETFs, debentures, Mutual Funds, and more, are converted to an electronic format and credited to an account known as the Demat account. Similar to the functions of a bank, the Demat account acts as a holding account for the account holder’s securities that are then debited and credited accordingly
What is a DP?
A Depository is a body that stores the securities of the investors in the Demat or electronic format. The National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL) are the two depositories of India. A Depository Participant or DP provides depository services to the investors, acting as a market intermediary for the investors. A DP can be anyone from brokers to banks, to other financial institutions. The Depository that will be holding the investor’s securities depends on which Depository the investor’s DP is associated with.
Why should one opt for a Demat Account?
Holding shares in a physical format is a tedious and lengthy process as it involves a significant amount of paperwork, electronically holding the shares also eliminates the risks associated with paper shares. A Demat account ensures a smooth and effortless process of investing and trading. The certificates of financial instruments like bonds, mutual funds, shares, and more are all held by the Demat account. Post the Depository Act of 1996, it is also compulsory to use a Demat account to trade in India’s stock exchanges. It is important to note that, the trade of currency, commodities, derivatives, and exchange-traded funds do not require the traders and investors to have a Demat account. Since these kinds of trading are settled with cash and do not generally involve stocks, it is not compulsory for investors to use a Demat account.
How to open a Demat account?
The very first step to open a Demat account involves selecting a DP, a list of registered DPs can be availed from the websites of both NSDL and CDSL. Once the DP has been selected, an account opening form has to fill up after which the investor will be required to sign an agreement with the DP. Following that, the investor will need to submit certain documents that include a proof of identity, proof of address, two passport size photographs, and their PAN card. Once the application has been sufficiently processed and verified, the investor is provided with an account number or client ID that can be used to access the newly created Demat account. The account holder can then proceed to purchase and sell shares and use the account to hold their stock portfolio. It is important to keep in mind that apart from the Demat account, an investor will also require a Trading account and the assistance of a stockbroker to buy and sell shares.
These are few suggested tips that can be followed in order to create and manage a Demat account:
- Before creating a Demat account, it is important to be thoroughly informed about the broker and/or brokerage firm before hiring them as one’s DP to look after one’s finances. Compare the difference in the charges of at least four or more brokers and brokerage firms in order to get a better idea of how much you should be paying. It is also advisable to compare the level of service provided by various firms to have an idea of the level of customer satisfaction that can be expected.
- It is critical to clearly understand the terms and conditions of a Demat agreement before opening an account. If the Power of Attorney or POA is given to the broker, the broker will the hold the authority to make debit and credit-related decisions on behalf of the account holder. However, such an authority can easily be misused, leading to the account holder losing control over their finances and the account. If the broker is handed the POA, they have the freedom to add certain clauses to the Demat agreement such as, preventing the issue of a Delivery Instruction Slip or DIS or preventing the account holders from further operating their account. The account holder must ensure that the broker in charge of their account has the authorization to operate their account only with their permission.
- If the workings of a Demat account is similar to that of a bank account, the Delivery Instruction Slip (DIS) can be said to have the same functions as that of a cheque book. It is essential to ensure the safekeeping of the DIS. Like a cheque book, the DIS has serial numbers as well as a client ID, it is important to make sure that these are pre-printed. If the DIS slip is left unattended, it can be misused to sell or transfer shares from the account holder’s account. In an effort to prevent to prevent such instances, the SEBI (Securities and Exchange Board of India) has taken a number of steps such as preventing the Depository Participant (DP) from accepting a DIS that has blank columns and has been signed before.
In the case of Demat accounts, the account holder has the option to “freeze” their account. If the account is not going to be in use for a significant period of time, the account holder can freeze the account’s operations to prevent any misconduct during their absence. The account holder can either freeze a specific set of shares from a specific company, or they can freeze the credit and debit of all shares in the account. The Demat account can be frozen by contacting the DP and filling up the required form for the process.
