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What is A Demat Account and How to Use it to Invest in the Stock Markets Research Team | Posted On Thursday, October 10,2013, 10:21 AM

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What is A Demat Account and How to Use it to Invest in the Stock Markets



The period after the liberalization of the economy post 1991 was categorized by a rapid development of our economy and the growth of the stock markets in India .In the last decade particularly in the period from 2004-2007 there was a boom in the stock markets and many investors in India jumped unto the stock market bandwagon .This was followed by a couple of years of gloom and again in the last three years the stock markets have spiked .So how does one go about investing in the stock market in India?

What is a Demat Account?

This is basically a dematerialized account where shares are held in an electronic format. This account is very necessary to buy and sell shares in the stock market. Physical shares may be lost, stolen or forged .No such problem exists with a demat account .In addition a demat account can also be used to store mutual funds, debentures and exchange traded funds. Demat account holders also do not need to pay stamp duty.

What is a Trading Account?

A trading account is an interface between ones bank account and the demat account .Funds are transferred from ones bank account to the trading account. The trading account is then used to buy shares and store it in the demat account. When shares are sold they are removed from the demat account and taken into the trading account. They are then sold in the stock market and the funds are transferred to ones bank account.

How Can One Open a Demat Account in India?

A demat account can be opened with any depository participant which might be a bank or even a stock broker who has the license to do so. One has to fill up the account opening form. A PAN card is a must for opening a demat account .In addition a signed copy of the voters card, passport and photographs might be needed for address proof and identification. The shares of all investors are held in electronic form in a depository. The two main depositories in India are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).The depository acts as the registered owner of the securities in the electronic form in the books of the issuing Company and the beneficial owner is the client .The broker buys and sells shares on ones behalf. An account number called BO ID (Beneficial Owner Identification Number) is then provided. Once the demat account is opened it is not possible to change the name of the holder .A new demat account needs to be opened and shares need to be transferred to this account. The old account needs to be closed.

See also: How To Open Demat Account?

What are the Charges Associated with Opening a Demat and a Trading Account?

Demat Account Opening Fees: This covers the cost of the agreement with the depository participant. These might be free of cost or in the range of INR 400-INR 1000.It is very essential to check the demat accounting opening charges before signing up.

Annual Maintenance Fees: These fees are charged in advance mainly for the maintenance of the account and the services rendered. These might be in the range of INR 300-INR 500.

Custodian Fees: This is mainly charged for the safe keeping of shares in the demat account and is charged based on the number of shares held in the account. This is a charge levied on a yearly basis .It might vary from INR 0.5- INR 1.0 per ISIN based on the number of shares held in a month.

Brokerage Fees: Whenever a share is bought or sold certain transaction or brokerage fees are charged. This might be 0.03-0.3% of the value transacted for intraday and 0.5% for delivery based transactions.

Dematerialization Fees: In order to convert physical shares to the dematerialized form certain nominal amounts are charged.

What is a Basic Services Demat Account or a No Frills Demat Account?

All depository participants will have to provide basic services demat account according to SEBI guidelines. One can avail of this service if one is yet to open a demat account or if one already has a demat account and is the sole or first holder. These kind of accounts provide limited services at a reduced cost to retail investors. There are no annual maintenance charges for balances between INR 0 to INR 50000.For a balance between INR 50001 to INR 2 Lakhs the no frills account charges INR 100.However the value of securities should not be more than INR 2 Lakhs at any given point of time .If one opts for electronic statements no fees are charged. If one opts for physical statements two statements are provided free of cost in one billing cycle. Additional statements are charged a fee which cannot be more than INR 25.

What is a Delivery Instruction Slip Popularly Called DIS?

A demat account is similar to a bank account where shares are stored in the electronic format. The DIS slip is similar to a cheque book. When the DIS slip is received by the depository participant it is processed and the clients account is debited the stated number of shares. High value transactions are thoroughly verified by the depository participant in order to avoid fraud.

  • Do not leave any signed blank DIS with anyone including the broker or sub broker as it is akin to leaving a signed blank cheque.
  • If only a single entry is made in the DIS slip strike out the remaining space in order to avoid misuse of the DIS slip.
  • Always personally fill in the details in the DIS and keep it safe when not in use.

How Does One Close a Demat Account?

Even if a demat account holder doesn’t transact on the account certain fixed charges like an annual maintenance fee needs to be paid. If one does not intend to hold any shares in this account then it should be closed down to avoid extra costs. The account holder must ensure that all shares held are sold, transferred or converted into physical form. The account holder submits the application in the prescribed format as specified by the depository. Any pending charges such as an annual maintenance fee need to be paid back before the account is closed. The unused DIS must be returned along with the closure form and a declaration needs to be given stating that all unused DIS has been destroyed. An account cannot be closed if the shares in the account are frozen .No demat closure request is entertained from a power of attorney holder.

I would like to end this article by stating that it is extremely necessary to do ones homework before investing in the capital markets. Small costs if ignored tend to be large costs and all charges in the demat account should be thoroughly studied before choosing the demat account and the depository participant. Never be in a rush to invest in the stock markets and weigh the options carefully before investing.

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