What is Demat Account? Listen to What is Demat Account Summary here ♬
A Demat account is a digital locker (tijori) which stores your financial assets in ‘electronic’ form. A Demat account stores assets like shares Shares
A company’s capital is divided into small equal units known as shares. Each share represents proportional ownership in the company. Learn about the 12 different types of shares.Read More, bonds Bonds
Bonds are fixed income securities used by companies or the government to raise debt. Bonds are of various types - fixed, zero coupon, vanilla, perpetual etc. Bonds are traded in the fixed income market.Read More , mutual fundsMutual Funds
Mutual Funds pool money from various investors and invest in asset classes such as equity, debt, gold etc. Mutual Funds can be actively managed or passively managed. Equity, Debt, Hybrid, Gold & Solution oriented funds are the 5 major types of mutual funds in India.Read More, exchange traded funds (ETFs) Exchange traded funds
Exchange traded funds are mutual funds which can be bought and sold on a stock exchange. They track and mirror a particular index like Sensex, Nifty, etc. They are cost efficient. Learn how to invest in ETFs.Read More etc.
Demat accounts were introduced in India in 1996 to end physical share trading. Physical share trading was prone to theft, loss, fake certificates and time consuming. Did you know that before Demat accounts, the settlement cycle used to take 14 days!
But everything changed in 1996 as Indian markets adopted ‘Dematerialisation’. The term ‘Demat’ is short for Dematerialisation. It is the process of converting physical shares into electronic form. When shares are held in Demat form, it eliminates the risk of loss, theft or forgery. Even the settlement cycle reduced from 14 to 2 working days!
Demat accounts have changed the way shares are traded in India. Today, there are more than 4 crore Demat accounts in India! Yet majority of investors are still confused about exactly what is a Demat account? This article covers everything you will need to know about Demat accounts in India.
In this article
What is a Demat account?
What is a Demat account used for?
What is a Depository?
What is a Depository Participant?
What is a Trading account?
What are the types of Demat accounts in India?
How does a Demat account work?
How to buy shares using a Demat account?
What are the advantages of a Demat account?
What are the disadvantages of a Demat account?
How to open a Demat account?
FAQs on what is a Demat account
What is a Demat Account? – Meaning of Demat Account
Demat account stands for Dematerialised account. A Demat account is like a bank account. While a bank account stores your money, a Demat account stores your ‘securities’ in digital form.
Let’s understand what is a Demat account with a simple example.
You go to a shoe shop to buy new sneakers. You try them on and decide to buy them. As you head to the payment counter, the salesman shouts, ‘Chotu packed piece de’. And a packed box falls from the sky! (the overhead godown).
Observe that the buying and selling takes place in the shoe store. But the actual shoes are stored in the godown. Every time a customer buys a shoe, a new box is given from the godown.
In this example, the godown is your Demat account and the shoe store is your trading account.Trading account
A trading account is compulsory for buying and selling stocks. You cannot store your assets in a trading account. Learn everything about trading accounts.Read More
- You store assets in a Demat account
- You buy and sell these assets from your trading account.
Watch our Video on What is a Demat Account? for a Quick Detailed Summary on Demat Accounts in India.
What ‘Securities’ can be Stored in a Demat account?
A Demat account is not just for shares. You can also store the following in a Demat account:
Equity shares Equity shares
A company’s capital is divided into small equal units known as shares. Each share represents proportional ownership in the company. Learn about the 12 different types of shares.Read More
Partly paid up sharesPartly paid up shares
Investors pay only a portion of the share price to the companies in case of partly paid up shares. The remaining amount is demanded by the company as per its requirements. They are sold at a separate stock price in the market.
Bonds are fixed income securities used by companies or the government to raise debt. Bonds are of various types - fixed, zero coupon, vanilla, perpetual etc. Bonds are traded in the fixed income market.Read More and DebenturesDebentures
Debentures are a type of long term bonds. But they are not backed by any collateral asset. Their term is usually more than 10 years. Issuers reputation and creditworthiness is crucial for debentures. They are issued by corporates and the government.
Commercial PapersCommercial Papers
CPs are unsecured money market instruments issued as promissory notes. They are issued by corporates and financial institutions. Their tenure is between 7 days to 1 year.
Certificates of Deposits (CDs)Certificates of Deposits
It is an agreement between bank and the depositor where a fixed amount is exchanged for a specific time period and interest rate. Maturity is 1-3 years. Minimum investment amount is Rs 1 Lakhs.
Capital GainsCapital Gains Bonds
These bonds are a way for investors to save up on their capital gains incurred on sale of property. REC and NHAI are popular capital gains bonds.
& Tax Free BondsTax Free Bonds
Tax free bonds are issued by government and municipal corporations. Investment in these bonds is 100% free of tax. These bonds are issued for a long duration - 10 to 20 years.
Treasury BillsTreasury Bills
Treasury bills or T-Bills are issued by the Reserve Bank of India. It’s maturity period is less than 91 days hence it is extremely safe. Mostly banks and mutual funds invest in T-bills.
Government BondsGovernment Bonds
These are issued by the government to finance its infrastructural and development projects. They can also be issued to manage the fiscal deficit. They are also known as gilt bonds. Learn everything about gilt funds.Read More
Sovereign Gold BondsSovereign Gold Bonds
SGBs are bonds denominated in grams of gold. They are a substitute for holding physical gold. They are issued by RBI. Investors get annual interest of 2.5%.
Mutual Funds pool money from various investors and invest in asset classes such as equity, debt, gold etc. Mutual Funds can be actively managed or passively managed. Equity, Debt, Hybrid, Gold & Solution oriented funds are the 5 major types of mutual funds in India.Read More
Exchange Traded Funds (ETFs) Exchange traded funds
Exchange traded funds are mutual funds which can be bought and sold on a stock exchange. They track and mirror a particular index like Sensex, Nifty, etc. They are cost efficient. Learn how to invest in ETFs.Read More
What are Depositories?
All Demat accounts in India are maintained with ‘Depositories’. A Depository is an entity like your bank. All your securities (shares, bonds etc.) are stored safely with depositories. There are two depositoriesDepositories
Depositories are financial institutions which store your assets in electronic form. A depository eliminates the risk of holding physical securities. In India, depositories are regulated by SEBI. NSDL & CDSL are the two depositories in India.
- National Securities Depository Limited (NSDL)National Securities Depository Limited
NSDL is one of the largest depositories in the world. It was established in 1996. It offers services to stock brokers, exchanges, custodians and issuer companies.Read More
- Central Depository Services Limited (CDSL)Mutual Funds
CDSL was founded in 1999. It has more than 3 crores investor Demat accounts.Read More
The main role of depositories is to transfer securities from one Demat account to another. This is similar to you transferring money from one bank account to another. Like bank has branches, depositories have Depository Participants (DPs).
What is a Depository Participant?
Your broker is your Depository Participant. He is the vital link between you and the depository. Samco Securities, Zerodha, Angel Broking, Upstox are some of the most popular depository participants in India. A depository participantDepository Participant
Your broker is your Depository Participant (DP). A DP is an agent of the depository. DPs are the key link between investors & the depository. DPs provide investors with a trading platform. They are governed under the Depositories Act, 1996.
helps you buy and sell shares using a Demat and Trading accountOnline Trading Account
Online trading account is used to buy and sell shares on the stock exchange. A trading account acts as a link between Demat account and bank account. Online trading accounts have given investors a one-point access to all markets - Equity, Commodities & Currencies.
What is a Trading Account?
A Trading account is used to buy and sell securities. It is different from a Demat account. A Demat account only stores your securities. You cannot buy or sell shares using a Demat account. To buy and sell shares, you need a trading account.
Investors often assume that only Demat or Trading account is required. But this is not true.
- If you only have a Demat account, then you cannot buy or sell (trade) your securities.
- If you only have a trading account, then how will you take delivery of the shares? In that case, you will only have to trade in Futures Futures
A futures contract is an agreement between the buyer and seller to exchange a fixed quantity of asset on a future date at a fixed price. Futures contracts are traded on an exchange with zero counterparty risks.Read More & Options Options
Options is a derivative. It is an agreement where the buyer has the right but not obligation to buy the underlying asset on expiry at a prefixed price. Call and put are two types of options.Read More (F&O) as they are cash settled.
- SEBI SEBI
The Securities and Exchange Board of India is the market regulator in charge of financial markets in India. It regulates all stock exchange and participants to protect investor interests.
has now made Demat accounts compulsory for even Intraday trading.Intraday trading
In intraday trading, buyers and sellers have to square-off their open positions on the same trading day. They cannot carry forward or take delivery of shares in intraday trading.Read More
Ideally you should have both Demat and trading account with the same broker for easy share trading and settlement.
What are the Types of Demat Accounts in India?
There are 3 types of Demat accounts in India. This classification is based on whether you are a Resident Indian (RI) or a Non Resident Indian (NRI).
Regular Demat Account: This account can be opened by all resident Indians. You can either open the Demat account in single or joint holding. If you open a joint Demat account, then it cannot be in ‘either or survivor’ mode. A maximum of three holders are allowed to open a joint Demat account.
You can also open a Demat account in the name of a minor (person below 18 years). Either of the parents can act as the guardian. But the account must be converted into ‘major’ or single account once the child becomes a ‘major’.
Repatriable Demat Account: A Repatriable Demat account allows you to transfer funds to foreign countries. This is perfect for NRIs who want to participate in the Indian markets and take profits or earnings overseas.
To open a Repatriable Demat account, you will need an NRE bank account. Repatriable Demat accounts are governed by the Foreign Exchange Management Act (FEMA). All brokers do not provide Repatriable Demat accounts. They can be opened with only authorised brokers specified by the Reserve Bank of India (RBI).
Non Repatriable Demat Account: A Non Repatriable Demat account is also for NRIs. But you cannot transfer funds back abroad. To open a Non Repatriable Demat account, you must have a Non Resident Ordinary (NRO) bank account.
These are the three main types of Demat accounts in India. But there is a special type of Demat account as well called ‘Basic Services Demat Account (BSDA). BSDA is a type of Regular Demat account but it carries no or low annual maintenance charges (AMC).
Only individuals fulfilling the below criteria can opt for BSDA:
- Individual should own only 1 Demat account across both the depositories.
- Value of securities in the Demat account should not exceed Rs 4 Lakhs.
- For Demat accounts whose holding value does not exceed Rs 1.5 Lakhs, no AMC is applicable.
How Does a Demat Account Work? – Demat Account & Trading Account
- Can you buy shares using a Demat account?
- What happens to the trading account when you sell shares?
- How does a Demat account work?
These are questions that majority of investors have when they start trading.
The rule is simple: ‘You CANNOT buy or sell shares using a Demat account’.
For example: Let’s say you subscribed to an IPO and received 100 shares. These shares will be ‘stored’ in your Demat account. After a month you want to sell these 100 shares. But you do not have a trading account.
Will you be able to sell these shares? No.
You can buy or sell shares ONLY through a Trading account. A Demat account merely acts as a ‘locker’ for your securities.
Let us understand how Demat and Trading account works when you place a buy order.
- Ram decides to buy 100 shares of Infosys Ltd.
- He funds his ‘trading account’ with Rs 1,35,000. The share price of 1 Infosys share is Rs 1,350. To buy 100 shares, he transfers Rs 1,35,000 from his bank account to his trading account.
- He goes to his trading platform (provided by the broker) and places a BUY order.
- The stock exchange finds a SELLER for Ram. Once a seller is found, the buy order is executed.
- Rs 1,35,000 is debited from Ram’s trading account and given to the exchange.
- The exchange collects 100 Infosys shares from the seller and in return gives him Rs 1,35,000.
- The exchange then gives Ram 100 shares of Infosys. These shares are transferred to Ram’s Demat account in T+2 days. This is known as the settlement cycle.
This is how Demat account works when you buy shares. The process might seem complicated, but it works like a well-oiled machine. The order matching takes place in seconds.
Remember, Ram used his ‘trading account’ to buy shares but the stock exchange ‘stored’ (credited) shares in his ‘Demat account’. The same process will happen for the seller as well.
Let us look at how Demat account works in case of a SELL order.
- Shyam wants to SELL 100 Infosys shares at Rs 1,350.
- Since he is selling shares, he does not need to fund his trading account.
- Shyam goes to his trading terminal and places a SELL order.
- The exchange matches the order with Ram’s buy order.
- The depository takes (debits) 100 shares from Shyam’s Demat account and credits them to Ram’s Demat account.
- Similarly, it debits Ram’s trading account with Rs 1,35,000 and credit Shyam’s trading account with Rs 1,35,000.
To summarise: When shares are bought or sold
|Demat account credited with shares||Demat account debited with shares|
|Trading account debited with cost of shares||Trading account credited with sale price|
We hope this clears any queries you might have on how Demat and Trading account works. Let us now understand the advantages and disadvantages of a Demat account.
Why Should you Open a Demat Account? – 10 Advantages of Demat Account
The short answer is because otherwise you cannot participate in the stock markets. Yes, as per Securities and Exchange Board of India (SEBI), a Demat account is mandatory to trade in the Indian stock markets.
The other reasons for opening a Demat account are:
One stop storage for all your financial assets: A Demat account does much more than just store stocks. It also stores your mutual funds, Mutual Funds
Mutual Funds pool money from various investors and invest in asset classes such as equity, debt, gold etc. Mutual Funds can be actively managed or passively managed. Equity, Debt, Hybrid, Gold & Solution oriented funds are the 5 major types of mutual funds in India.Read More, government bonds, ETFs etc. all in one place. This is perfect as you do not have to maintain different accounts or coordinate with multiple brokers to know the value of your portfolio. You can simply login to your Demat account and know the current value of all your financial assets.
Quick Settlement: Before 1996, all trades were settled physically. To buy shares, you had to give the cash to your broker. He would then go to the stock exchange to find a seller. Similarly, the seller would hand over physical share certificates to the broker who would search for a buyer in the market. When both brokers met, a transaction would be ‘brokered’. The entire process took 14 days.
But due to Demat accounts, all settlements take place in T+2 days. T stands for transaction date. For example: If you bought shares on Monday, they will be credited to your Demat account by Wednesday evening. This is possible only because of Dematerialisation.
Elimination of Theft/Loss/Fake Shares: Physical shares would easily get stolen or lost. There were instances where fake shares were being sold in the market. But with Demat accounts, you no longer have to worry. ‘Registrars & Transfer Agents’Registrars & Transfer Agents
RTAs register and maintain detailed records of investor transactions in mutual funds. They record change of ownership, issues and cancels securities and distribute dividends.
ensure that the transferred securities are ‘original’.
Easy Liquidation: With Demat accounts, you can easily sell shares on the exchange in seconds. This was not possible during physical settlement. Your broker had to physically find the seller and make a deal. This process would take days! But with Demat accounts, you can easily sell your securities and even get a loan against them. Banks provide easy loan against securities held in electronic form.
Low Cost: Reduced cost is one of the major advantages of Demat accounts. Earlier, investors had to pay high stamp duty charges. But now investors have to pay only 0.015% stamp duty charges for share transfer.
Easy Transfer: It is easier to transfer assets held in a Demat account to next of kin in case of death of the account holder. This was quite difficult when shares were held in physical form. The legal heirs had to go through various legal hoops to claim the assets. This led to emotional, physical and monetary stress. But with Demat accounts, assets can be seamlessly transferred to legal heirs.
Elimination of ‘Odd Lots’: Before Demat accounts, shares were usually traded in lots. So, you could not buy or sell single shares. For example: If you wanted to buy 1 share of Infosys, you can easily buy it today using your Demat account. But before 1996, you had to either buy an entire lot or buy nothing!
Elimination of Vanda (Bad) Trades: Physical share trading involved a lot of manual work. This also resulted in manual errors also known as Vanda trades. Elimination of Vanda trades has been one of the biggest advantage of a Demat account.
Central Point for Information Updating: Earlier, if you changed your residential address, phone number or email id, you’d had to inform multiple companies. But with Demat account, you can update your Know Your Client (KYC) records at one central location and the same will be updated across all your securities.
Simplified Accounting & Management: Before dematerialisation, investors spent hours and days trying to reconcile their Demat statements. Calculating taxes was a nightmare! This is no longer the case. With a Demat account, your broker sends you your reconciled Demat statement every month.
Should You Open a Demat Account? – Major Disadvantages of a Demat Account
High Demat Charges: The biggest disadvantage of a Demat account is the cost involved in opening and operating a Demat account. Traditional brokers charge as high as Rs 400 for just opening a Demat account. Discount brokers like Samco Securities provide free Demat account opening. So you get instant benefit of Rs 400. Discount brokers charge flat brokerage which leads to 98% brokerage savings!
The best way to avoid high Demat charges is by opening a FREE Demat accountOpening a free Demat account Open a free demat account in 3 easy steps:- Fill in your pan number, date of birth & Aadhaar card details. - Upload your documents. - Verify your Aadhaar details through OTP and within 24 hours your free demat account is opened.
Read More with brokers like Samco Securities. Samco has also waived off 1st year AMC! So, you are practically trading for FREE.
High Churning: Intraday Trading was not popular before Demat accounts. Investors would often buy shares for the long-term. But with Demat account, a host of trading opportunities have become available. Investors are indulging in excessive trading and not focusing on long-term investing. The best way to deal with this is to divide your investible amount between trading and investing.
Technology Savvy: Introduction of Demat accounts led to a revolution in online share trading. Computers replaced broker’s office. Everyone and anyone with an internet connection and mobile started trading. But investors who were not tech savvy suffered. Fortunately, there are brokers like Samco Securities which provide high tech trading platform which is easy and user-friendly.
Like everything else, even Demat accounts have their disadvantages. But luckily, advantages of Demat accounts far outweigh their disadvantages. Hence, every investor should open a Demat and trading account.
Now that you understand what are Demat accounts, let us take a look at how to open a Demat account.
How to Open a Demat Account – A Step-by-step Guide to Opening a Demat Account in India
Step 1: Select a Broker
A Demat account is opened with a broker, also known as a Depository Participant (DP). The Indian markets are flooded with brokers. But before selecting a broker to open a Demat account with, you need to go through the below checklist.
- Your broker must be registered with SEBI.
- Your broker must provide FREE Demat account.
- Your broker must be well-capitalised.
- Your broker must provide high tech trading platform with 99.99% uptime.
- Your broker must provide high leverage against minimum margins.
Once you select the broker, the next step is to compile the documents required to open a Demat account.
Step 2: Compile Documents Required to Open a Demat Account
The following documents are required to open a Demat account.
Step 3: Fill Demat Account Opening Form
Fill the Demat account opening application form and submit the above mentioned documents. In 24-48 hours your Demat account will be active. Brokers like Samco Securities offers 3-in-1 account. So, you get a Demat, Trading and Mutual Fund account at the cost of one!
Step 4: Fund your Trading Account
Once your Demat account is opened, you need to fund your trading account (linked to your bank account) and start trading! It’s as simple* as that.
*Simple: Many traditional brokers still insist on physical forms and visiting their office for in-person-verification. The account opening process can take days. It is recommended to avoid such brokers and open a Demat account with a discount broker like Samco Securities which helps you open a FREE Demat account with 0% paperwork under 5 minutes.
Open a Demat account for FREE with Samco Securities – The best broker in India in just 5 minutes – 0% paperwork guaranteed.
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FAQs on What is Demat Account
- Resident individual
- Hindu Undivided Family (HUF)
- Domestic Companies
- Clearing members
The documents required and the procedure changes for each category.