The shares and securities that you invest in are held electronically in a dematerialised account or a demat account instead of possessing physical certificates. In 1996, dematerialisation was adopted by share market. It is the process which involves the conversion of physical share certificates – owned by the investors – into equivalent digital securities. These electronic securities are then credited into investors’ Demat account. Simply put, Demat account is a kind of bank account which holds all your shares in a digital or dematerialised form. So just like a bank account, it holds all the certificates to your financial investments like shares, Bonds, Mutual Funds, Exchange Traded Fund(ETFs), and government securities.
It is not compulsory to have a Demat account to invest in Mutual Funds but, it is essential to have one in order to trade in the stock market.
There are four components involved in the working of a Demat account. We will look into each one separately:
National Securities Depository Limited(NSDL) and Central Depository Services Limited(CDSL) are the two depositories in India which hold all the Demat accounts. These depositories hold the details of your share certificates and other financial instruments just like a bank.
Each Demat account has been assigned a unique identification number or a UID. This number is used for online trading purposes. This number helps the company and the stock exchange to identify you and credit the shares in your account.
Depository Participants or DPs provide the access to the central depository and act as the intermediary between the central depository and the investor. A DP could be a bank, brokers or some financial institute empowered to offer the Demat services. You have to open a Demat account or a Beneficial Owner account with a DP to get the access of the UID to the central depository.
Whenever you access your Demat account you can see all the details of your portfolio. These details are updated automatically after every transaction, be it buying or selling.
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Select a depository participant (DP)
Fill up the form of registration and submit it with the required documents and a passport sized photo. PAN card is a must to open a Demat account. Also, you must be ready with the original documents in case of verification.
Carefully read the rules and regulations and the terms of the agreement. Also, examine the charges that will be imposed on you.
Once the application form is processed, you will have your account number and UID. You can also use these details to access your account online.
You would need to pay account charges like the annual maintenance and the transaction fee. These charges differ for different DPs.
There is no minimum balance of shares required to open the account.
Before opening a Demat account you should compare and check the Demat account charges. Opening an account can vary for different financial institutes. The charges depend on the intensity of the investment as well.