What is Demat Account? Features & Benefits of Demat Account

Overview of Demat Account

Demat Account stands for dematerialisation account. Demat account holds the securities like shares, bonds, government securities, Mutual Funds, Insurance and ETFs in an electronic form. It is compulsory to have a demat account for the investors to buy and sell shares in India. The investor has to open a demat account with a depository through a Depository Participant.

Demat Account is an electronic account where the investors hold shares of various companies in the dematerialised (electronic) form. Shares owned by the investors are held electronically in his/ her demat account. Demat Account gives the facility to an investor to buy or sell shares in a secure and safe way over the internet in electronic form.

Features of Demat Account

1. Provides facility to trade online
2. To dematerialise and rematerialise the shares
3. Provides easy pledging facility to avail Loans
4. Easy and fast transfer of securities in demat form
5. It makes it easy for you to check and manage your securities online
6. Avail of a loan against shares

How Does a Demat Account Work?

Demat account works just like your bank account. Like you store cash in the electronic form in your bank account, you can also store your securities in your demat account. Demat account keeps your securities in digital form and there is no need for paper documents. When you buy any security, it is credited in your demat account and when you sell the security, it is debited from the demat account. It is mandatory to link your demat account to your trading and savings account, if you want to transact in securities through your demat account. Many banks offer the facility to open 3-in-1 account that links your savings, demat and trading account.

Benefits of Demat Account

1. Fast processing due to instant transfer of stocks from one account to another
2. Reduced transaction cost
3. No stamp duty on transfer of securities
4. Risks of losing shares due to theft, fire, flood and earthquake do not exist
5. Safer than paper-shares
6. Minimization of paperwork
7. Convenient way to hold securities in electronic form
8. Convenient method of consolidation of folios/accounts.
9. Investments in equity, debt instruments and Government securities held in a single account.
10. Immediate transfer of securities
11. Even one share can be sold
12. Change in address recorded with a Depository participant (DP) automatically gets registered with all companies in which investor holds securities. Therefore, there is no need to correspond with each company separately by the investor/li>
13. Transmission of securities is done by DP eliminating correspondence with companies
14. Automatic credit into demat account for shares arising out of Corporate Benefits like IPO, bonus, split, consolidation, merger, etc.
15. Nomination facility is provided in demat accounts
16. In one demat account, the investors can keep investments in both equity as well as debt instruments. Further, they can keep the units of Mutual Funds, Exchange Traded Fund (ETF), etc.
17. Investors/ Traders are free to operate from anywhere

Disadvantages of Demat Account

1. The investor needs to be internet savvy
2. Investors have to pay various fees to the DP to maintain their demat accounts such as annual maintenance fees, charges for dematerialisation, transaction charges for debit of securities, fees for pledge of securities, etc.
3. There are many regulatory frameworks that have to be conformed to such as the Depositories Act, Regulations and the various Bye-Laws of various depositories.
4. Agreements are entered at various levels in the process of dematerialization.
5. It is not possible to close a demat account having illiquid shares and the investor is required to pay the charges to the depository participant regularly.
6. Most of the investors don't know that it is necessary to close their DP (Depository Participant) Account after liquidating the holdings and the DP can charge them fees, if the account is not closed.
7. Many investors are unaware that DP charges on dormant account as well.

Points to be Checked before Submitting Demat Application

• Name appearing on certificates should match with that in the Demat Account
• Quantity, number of certificates, folio number, certificate numbers and distinctive numbers should be written on the Demat request form very carefully and without any error
• Separate forms are to be filled up for each category of shares i.e. equity/preference etc.

Important Points regarding Demat Account

• A Demat Account can be opened with no balance of shares.
• You can have multiple demat accounts, if you wish so.
• A Demat Account does not require that a minimum balance be maintained.
• You can choose your DP as per your choice & convenience.
• It is not compulsory to open DP account with your stock broker. You can open it with any DP of your choice.
• DPs are free to charge either a flat fee per transaction or on the basis of the transaction value subject to a fixed minimum amount.