“Demat” is the truncated form of the word “Dematerialization”. Thus, a Demat account is an account that holds your securities in dematerialized format. As per SEBI mandate, all entities desirous of trading or investing in the stock market must have a Demat account.
The COVID-19 pandemic-driven job and pay cuts led to a large number of retail investors flocking the stock market in 2020. Between April 2020 – January 2021, the number of newly opened Demat accounts reached a record high of 10.7 million. This is more than twice the number of new Demat account registrations of 4.7 million in FY 2019-20. According to BSE data, as of May 31, 2021, the total retail participation headcount in the stock market is around 6.97 crores.
The depositories – CDSL and NDSL, are at the helm of Demat account services in India. Stockbrokers or intermediaries must be registered as Depository Participants (DP) with either of them. In the absence of a valid DP license, intermediaries are not allowed to offer Demat account services to the general public.
In the consecutive sections, we will dig deeper into the definition of a Demat account and its usage.
Demat meaning
Dematerialization is the process by which physical securities are converted into digital form. Hence, a Demat account can be defined as an account that holds your securities in electronic form. Virtual securities make online trading simpler. In other words, a Demat account enables you to execute online trades smoothly and seamlessly. It also safeguards you from the risk of loss, theft, damage, or mutilation of physical security certificates.
A Demat account holds shares, mutual funds, ETFs, government securities, debentures, and bonds. However, it does not hold derivatives like futures, options, swaps, etc. This is because a Demat account is a digital repository of your stock market assets only. Derivatives are contracts and not assets. Moreover, most derivative contracts are cash-settled. Hence, they need not be held in digital format.
With a Demat account, you can monitor all your stock market investments in a single place. Earlier there were ceilings on trading quantities of physical securities. Moreover, securities in paper form attracted higher handling charges. Such limitations have been eliminated by Demat accounts.
Using a Demat account
Newbies often find it overwhelming to understand how to operate a Demat account and the technicalities of the same. In easy language, a Demat account is analogous to a bank account. The only difference between the two is that the former shows debit and credit of securities while the latter shows debit and credit of money. The Demat account application process is briefly explained herein.
The first step towards using a Demat account is to select a stockbroker. You may evaluate a broker based on various parameters like service range, value-added services, brokerage costs, pricing plans, your investment style, etc. Accordingly, as per your suitability, you may make a final choice.
The second step is to fill out Demat and trading account application forms on the selected broker’s website. A trading account is essential for transacting in secondary markets. Moreover, a Demat account cannot work in isolation to execute a trade successfully. It needs to be linked with your bank and trading accounts.
The next step is to complete the KYC process. You need to upload soft copies of identity proof, address proof, income proof, your latest passport-sized photograph, and a canceled bank cheque. Any government-issued ID will work as a valid identity and address proof. Thereafter, you have to complete the IPV (In-person Verification) process.
Once the KYC formalities are done, you need to accept the Demat & trading account terms and conditions. Then, you have to do an e-signature, cross-check your forms, correct errors if any, and submit them. Your application process is done. You will receive your Demat and trading account numbers from the broker shortly.
Once you receive your account numbers, you can start online trading immediately. There are many built-in technical indicators on online trading platforms to assist you in stock trading.
Demat account with low brokerage
Brokerage charges constitute the major portion of your overall transaction costs. Thus, you may select a broker with the most competitive brokerage rates. Usually, discount brokers charge lesser brokerage than full-suite brokers because they do not offer research and advisory services.
Moreover, equity delivery trades attract lower brokerage than intraday, margin, and derivative trades. You may also check the MTF interest rates and Demat AMC levied by the broker. The lower these charges, the better. In addition, based on your trading frequency, volumes, and style, you may opt for the flat-fee or volume-based pricing structure.
Final Words
Demat means dematerializing your physical securities and converting them into digital format. Using a Demat account is fairly straightforward. Apart from facilitating the purchase and sale of securities, a Demat account offers other facilities like rematerialization, nomination, periodic investment statements, IPO application, and investment tracking.
Usually, discount brokers offer Demat accounts with low brokerage. Your brokerage costs are further reduced if you select the right subscription plan. If you are a passive investor, a basic or beginner plan will suffice. If your trading volumes are high, you may opt for a fixed-fee plan instead of a volume-based plan and vice-versa. If you are a professional trader, you may upgrade yourself to advanced subscription packs with a margin trading facility.