What is a Demat account?
The account that holds records of shares bought and sold by the account holder is known as a Demat Account. A Demat account is, in general, operated by the account holder. However, Depository participants act as an intermediary in the process. Account holders can put in requests to sell or buy a share which is then forwarded to the stock exchange by the Depository participant.
How to operate a demat account?
The operation of a Demat account depends on the linking with two other accounts. Demat accounts are required to be linked to a trading account and a bank account.
1. Trading account & Demat account – Demat accounts only hold records of sold and bought shares. However, actual trading is conducted through a trading account. Hence, it is necessary to link the trading account with a Demat account. All of your transactions done through the trading account are recorded in the Demat account in the form of electronic copies.
2. Bank Account and Demat account – All amounts credited and debited during transactions of shares are sourced from the bank account. It is obligatory to link the bank account with Trading and Demat accounts for successful transactions and records. All amounts credited or debited are reflected on the bank account almost immediately.
Steps of a demat account's operation
Bank account – Similar to regular banking, all transactions for buying and selling shares are done from the bank account.
Trading account – Since it is not possible to directly buy or sell a share from the bank account, the trading account provides the service of buying and selling shares.
Demat account – The primary use of Demat account is to record the transactions of shares. When a transaction on the trading account is successfully processed, the record of the purchase or sale is recorded electronically in the Demat account.
Activity – It is crucial to conduct occasional transactions of shares to keep the Demat account active. In case the account holder does not conduct any transactions for an extended period, the Demat account is noted to be dormant.
Why is a Demat account necessary?
The Depositories Act of 1996 mandates the use of a Demat account for buying and selling of shares. However, apart from the mandatory requirement, the advantages of Demat account cannot be overlooked. The benefits of Demat account outweigh the brief inconvenience of waiting to open a Demat account. Demat accounts facilitate safer banking and transparency of transactions.
Security – The major advantage is high security. Demat accounts are maintained by the two depositories in India, National Securities Depository Limited and Central Depository Services Limited. The transactions of trading are recorded electronically in the depositories and hence cannot be destroyed. Earlier, there were several risks associated with holding physical certificates, such as bad delivery, fake certificates, delay of delivery, theft, damages, etc. With the introduction of Demat accounts, all risks associated are minimised.
Convenient – In addition to security, Demat accounts are convenient and hassle-free. Conventional share transactions presented one of the most issues of ‘odd lot.’ Conventionally, investors were forced to buy and sell a minimum amount of shares. With the introduction of Demat accounts, investors can buy or sell any amount of shares as low as a single share.
Time-saving – In today's world, no one has the time to visit a bank for hours frequently. Demat accounts allow investors to trade directly from home. Credit and debit of amounts are reflected on the account automatically. Using a Demat account cuts down on the hassle of collecting statements from the bank as bank statements are sent directly to the investor.
One stop destination - You can hold various investments like mutual funds, equity shares, bonds and exchange-traded funds under a single demat account.
Quick monitoring - Demat accounts facilitate easy monitoring of the holdings anytime, anywhere.
Receiving dividends/interest - Dividends, interest, or refunds reach the demat account holder without any delay. A demat account is automatically updated with bonus issues, stock split or rights shares.
Costs involving Demat account
One of the most significant benefits of Demat account is its minimal cost operation. Operating a Demat account involves a few charges such as Demat opening charge, Custodian fee, Annual Maintenance Cost (AMC), and Demat account transaction charges.
Demat opening charge – Currently, demat opening changes can be minimal or nil depending on the DP. Online discount brokers such as 5paisa offer legitimate demat accounts at zero opening charges.
Custodian fee – Custodian fee or safety charge is charged by Depository participants one time or annually. However, Investors are not required to pay the custodian fee since the fee is directly paid to the depository by companies.
Annual Maintenance Cost (AMC) – As reported by Moneycontrol, annual charges are in general paid in advance and may range from rupees 300 to 900 per annum. AMC charges vary depending on the Depository participant.
Demat account transaction charges – Depository participants may levy a nominal per-transaction charge or a monthly fixed charge.
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