The days of physical shares are long gone. Shares of companies are now available in electronic formats. A Demat account is an electronic account that digitally holds different types of securities. Thus, opening a Demat account is the first step in trading on the stock market. This article discusses several aims and objectives of Demat accounts.
What is a Demat Account?
A Dematerialised Account or Demat Account allows you to hold shares and securities electronically. It facilitates easy trading for online traders, as shares are purchased and stored there. Demat Accounts help keep track of all investments made by an individual, whether they are government securities, shares, exchange-traded funds, bonds and mutual funds.
With the introduction of Demat, Indian stock trading has been digitised, and SEBI could enforce better governance. By storing securities in electronic format, a Demat account reduces the risks of theft, damage, and malpractice.
NSE introduced Demat for the first time in 1996. Previously, opening an account was manual, and it took several days to activate the account. The process of opening a Demat account today takes five minutes online. Digital technology contributed to the popularisation of Demat during the pandemic.
Types of Demat Account
A Demat account in India can be classified into three types. Indian residents and non-resident Indians have different types of Demat accounts.
1. Regular Demat account
An Indian resident can open a regular Demat account if they want to trade shares alone and store securities. When you sell stocks, your Demat account is debited, and when you purchase, your account is credited.
2. Repatriable Demat account
The purpose of a repatriable account is to allow non-resident Indian investors to transfer their earnings from Indian markets abroad. The account must be linked to an NRE (Non-resident External) bank account. Repatriable accounts require closing your regular Demat account in India and opening an external non-resident account.
3. Non-repatriable Demat account
Non-repatriable Demat accounts are another type of Demat account you can consider if you're an NRI. Unlike a repatriable Demat account, you cannot use a non-repatriable Demat account to transfer funds abroad; you'll need to link an NRO account (Non-Resident Ordinary).
Documents Required for Demat Account
To prevent fraudulent activity, you must submit the essential documents when opening a savings or Demat account at a bank or brokerage firm. This process is known as KYC (Know Your Customer) or customer identification.
Below is a list of some documents needed to open a Demat account.
● Proof of Identity (POI): You must submit a PAN card, an Aadhaar card, a voter ID card, or a passport.
● Proof of Address (POA): You must submit a ration card, utility bill, passport, driving license, or bank statement as proof of residence.
● Bank Account Number: You can use your bank statement or a cancelled check.
● Proof of Income: Tax returns or payslips
● Passport size photographs
Aims and Objectives of Demat Account
The following are several aims and objectives of Demat accounts for your information.
Safety is the primary contender among the aims and objectives of a Demat account.
The chances of losing or misplacing certificates when shares were available in physical form were high. With a Demat account, your shares are stored digitally and safely so you do not have to worry about losing your shares.
Trading in capital markets has become easier with Demat accounts. You do not need to carry cash to the stock exchange. Additionally, it eliminates human effort, providing maximum convenience. This convenience is one of the most important aims and objectives of a Demat account.
3. Cost Efficiency
Physical trading involved a lot of paperwork, which was time-consuming. Currently, the system is efficient and reduced trading costs.
A Demat account also eliminates the need for stamp duty. Previously, you had to buy a share transfer stamp and attach it to the bottom of the certificate to trade physical shares. The cost and difficulty of getting share transfer stamps were greater for investors from small towns. As a result of removing stamp duty, Demat accounts have reduced the cost of trading and made it a lot more convenient for investors.
Dematerialising is the conversion of physical share certificates into an electronic form, which you can maintain from anywhere in the world and are more convenient to access. If an investor wishes to trade online, they must open a Demat account with a Depository Participant (DP). A DP in India opens a Demat account through two depositories: the Central Depository Services Limited (CDSL) and the National Securities Depository Limited (NSDL). By Dematerialising share certificates, investors are no longer required to hold physical stock certificates and their holdings can be tracked and monitored seamlessly.
Previously, the issuance of share certificates was time-consuming and cumbersome. Demat has helped streamline the process and store security certificates digitally. The Dematerialisation Request Form (DRF) must be submitted with all your physical securities after your Demat account is active to convert paper certificates into digital ones. You should also mark each physical certificate by writing 'Surrendered for Dematerialisation'. When you surrender your share certificates, you will receive an acknowledgement slip.
Stocks are not the only form of investment to Dematerialise; bonds, mutual funds, and government securities are included too. Dematerialisation and Demat accounts are comparable to maintaining one's assets through a bank, instead of personally storing and exchanging paper money whenever a transaction takes place.
Physical certificates are converted into electronic securities holdings through rematerialisation. Essentially, it is the reverse of Dematerialisation, where investors who have converted their shares to electronic form can now convert them back to physical form. Rematerialisation entails the cancellation of shares' digital existence and the issuance of new physical shares.
In many cases, rematerialisation is used to avoid paying the Demat account maintenance fee for just one or two shares. To process shares during rematerialisation, the Registrar and Transfer Agent (RTA) assigns a separate number.
The rematerialisation of shares allows every share trading transaction, including documentation, to take place physically. Keeping track of physical shares is the company’s responsibility when they are maintained in physical form. A Remat Request Form (Remat Request Form) must be completed and submitted to the Depository Participant to rematerialize shares. Following the successful rematerialisation of their shares, RTA issues them with new physical certificates.
Meanwhile, rematerialisation can take up to 30 days and is extremely complicated. Investors must follow various procedures to rematerialise their shares into physical assets.
For many investors, Demat accounts simplify their investing journey by enabling simultaneous access through multiple mediums. With a Demat account, you can trade seamlessly through your smartphone, tablet, or computer without hassle.
However, despite its necessity, the Demat account is only one part of an enormous system. You should also have a bank account and a trading account. Perform thorough research and choose a reputable brokerage firm for your Demat-cum-trading account.
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Frequently Asked Questions
Opening a Demat account online is generally safe, specifically via a broker's official website. The Securities and Exchange Board of India monitors these brokers or depository participants.
There are three types of Demat Accounts:
Repatriable Demat Account
Regular Demat Account
Non-repatriable Demat Account
The most famous stock broker in India is 5paisa.
It is possible to open more than one Demat account with different brokers. Multiple Demat accounts with the same broker are not allowed.