Demat refers to a Demat erialized account. If you want to buy or sell stocks you need to open a Demat account. It is just as opening an account with a bank. To open your Demat account you have to approach the DPs (Depository Participant). Demat account will help you to buy and sell shares without endless paperwork and delay.
Let's say your portfolio of shares looks like this: 50 of BHEL, 40 of RPower, 60 of Tata Motors and 100 of Sesa Goa. All these will show in your Demat account. So you don't have to possess any physical share-certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they will be automatically adjusted in your account. The DP will provide you with periodic statements of holdings and transactions. The charges for account opening, annual account maintenance fees and transaction charges vary between DPs (Depository participants).
Practically all the trades have to be settled in Dematerialized form. So a Demat account is a must for trading and investing.
How to Open a Demat Account?
For opening a Demat Account, You should approach a DP and fill the Demat account opening form. NSDL and CDSL Web sites will list the approved DPs. Then you will receive an account number and a DP ID number for your account. Quote both the numbers in all future correspondence with your DPs.
Where actual money is replaced by shares so it is just like a bank account, you should approach the DPs to open your Demat account. For Example: Your portfolio of shares are 200 of Wipro, 100 of Infosys, 50 of HCLTECH, All these will show in your Demat account, you don’t want to show any physical certificates that you hold that shares. If you buy or sell the shares all are held electronically in your account. It is just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.
Is Demat Account Must?
Nowadays, almost all trades have to be settled in Dematerialised form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.
Benefits of Demat account
- A safe and convenient way to hold securities
- Immediate transfer of securities
- No stamp duty on transfer of securities
- Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
- Reduction in paperwork involved in transfer of securities
- Reduction in transaction cost
- No odd lot problem, even one share can be sold;
- Nomination facility
- Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately
- Transmission of securities is done by DP eliminating correspondence with companies
- Automatic credit into Demat account of shares, arising out of bonus/ split/ consolidation/ merger etc.
- Holding investments in equity and debt instruments in a single account.
Disadvantage of Demat account
- Securities may become uncontrolled in case of Dematerialized securities.
- Incumbent upon the capital market regulator to keep a close watch on the trading
- Stock-brokers, needs to be supervised as they have the capability of manipulating the market
- Various regulatory frameworks have to be complete to, including the Depositories Act, Regulations and the various By-Laws of various depositories.
- Additionally, agreements are entered at various levels in the process of Demat erialization.
There are four major charges usually levied on a Demat account:
- Account opening fee
- Annual maintenance fee
- Custodian fee and
- Transaction fee.(All the charges vary from DP to DP)
Account opening Fee
Private Banks, such as ICICI Bank, HDFC bank and UTI bank, do not have any account opening charge. Depending on the DP, there may or may not be an opening account fee. However, players such as Karvy Consultants and the State Bank of India charge it. But most players levy this when you re-open a Demat account, though the Stock Holding Corporation offers a lifetime account opening fee, which allows you to hold on to your Demat account over a long period. This fee is refundable.
Annual maintenance fee
This is also called as folio maintenance charges, and is generally levied in advance
This will be charged monthly depends on the number of securities (international securities identification numbers – ISIN) held in the account. Generally it is between Rs. 0.5 to Rs. 1 per ISIN per month.
The transaction fee is charged for crediting/debiting stocks to and from the account on a monthly basis. While some DPs, charge a flat fee per transaction, and some DPs peg the fee to transaction value, subject to a minimum amount.
The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities while others charge for both. DPs will charge if your instruction to buy/sell fails or is rejected. Service tax is also charged by the DPs. DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa.