Exchange Traded Funds (ETFs), Mutual Funds, Insurance, and other financial instruments can now be traded and held more easily thanks to the Demat system, which was first introduced in 1996 on the NSE.
With a Demat account, it is easier to invest in shares and other securities that are available in electronic form.
These accounts are specifically designed to convert share certificates from physical to electronic format, increasing account holders’ accessibility.
Demat accounts are now needed to trade on Indian stock markets. Demat accounts exist in many shapes and are employed in various ways.
For Indian citizens, opening a regular Demat account is rather simple. Using brokers of your choosing is an option.
If you are an Indian citizen and are at least 18 years old, you are eligible to open a Demat account.
In addition to the account opening application form, you should enclose the necessary proof of your identification and address.
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What is Demat Account
Understanding how a Demat account function requires a working knowledge of what a Demat account is.
Dematerialization, or “Demat,” converts physical securities into electronic form. As a result, a trader can hold, transfer, and transact securities using a Demat account without handling physical securities.
Trading has consequently evolved into a much safer, faster, and more effective way to execute trades and store assets.
You require a Demat account to trade shares on the stock market. You can own shares and securities in a dematerialized manner using this account.
With this account, investing, trading and monitoring are all simple and convenient processes.
You maintain a share in a Demat account the same way you maintain cash in a bank’s savings account. You can open any Demat account with a depository participant offline or online.
Remember that you can open an additional Demat account within the same or another depository participant.
Two additional accounts are essential for a Demat Account to function:
- Your trading account differs from a Demat account in that it serves only as a repository for funds for trading.
- Your bank account is connected to your trading and Demat accounts. To purchase and sell, you must transfer funds from this bank account to your trading account; the funds are received in the same bank account.
Demat Account transactions now include several parties.
- Two Indian depositaries handle Demat Accounts
- The BSE-affiliated Central Depositary Services Limited
- The NSE-affiliated National Securities Depositary Limited
- Depository participants are the bank or financial institution where your Demat and trading accounts are held or an approved stockbroking business.
- Clearance houses that handle the debit and credit of shares in the accounts of buyers and sellers. The country’s two primary clearance houses are:
- National Securities Clearing Corporation Ltd.
- The Indian Clearing Corporation Ltd. Trades are conducted on the BSE Stock Exchange, where clearing houses control and carry out transactions.
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How does the Demat account work
Three parties—your bank, the depository participant, and the depository—are involved in opening a Demat account. For easy trading, you must link your bank account and Demat account.
By connecting your account information, you may ensure that when you acquire shares, money is automatically deducted from the bank account and credited to your account when you sell them.
A bank, a non-banking financial institution, or a stockbroker are all examples of depository participants.
To establish a Demat account, you must speak with a DP. The depository is undoubtedly the third party. For you, they manage the Demat account.
In India, opening a Demat account is a simple process in which the account maintains the share in electronic form.
With a Demat account, it is easier to invest in shares and other securities that are available in electronic form.
These accounts are specifically designed to convert share certificates from tangible to electronic format, increasing account holders’ accessibility.
Each stockbroker assesses specific Demat account opening fees for the services provided and the overall maintenance of the Demat account.
The broker adds the appropriate shares to your Demat account whenever you purchase shares on the stock market.
Your holdings statement has been updated to reflect this. Similarly, you must provide your broker specific instructions on how to proceed when you sell shares.
The shares are then sold, and the proceeds are deducted from your account. Your Demat and trading will make it obvious how many shares were sold and what amount of money was credited to you if you trade online.
Demat accounts operate like bank accounts. A Demat account needs to be connected to a trading account to operate to its fullest capacity.
When you purchase a stock in a company using your trading platform, your depository participant passes your “buy” order to the stock exchange.
The exchange matches your “buy” order with the corresponding “sell” request made by another trader or investor.
Once your order has been matched, a stock exchange order is transmitted to a clearance house to complete the trade.
At the conclusion of the trading day, your Demat account will be credited with the number of shares you purchased once the transactions have been finalized.
The seller’s Demat account is simultaneously debited for the quantity of shares that have been sold.
You won’t need to be concerned about your current shares if you decide to move brokers due to the unsatisfactory service and resources your current broker offers.
Transferring shares from one Demat Account to a different is simple. Additionally, you can eliminate the effort of typing out your information each time by simply linking your Aadhaar with your Demat Account.
According to the Depository Act, passed in 1996, having a Demat account is required. The National Securities Depository Limited was established in 1996 to make it easier.
Three years later, Central Depository Services Limited followed as the second such organization.
All of the investors’ electronic securities are held in custody by the two organizations collectively.
Through a number of depository participants, including Angel One, they provide the Demat account opening service. Both agency and the brokers they work with have SEBI registrations.
Amit Gupta is the creator of FreeDematAccount.in, a website that specializes in Demat accounts and provides assistance to all its users in navigating through complicated decisions. After completing his high school certification, Amit spent half a decade learning about Demat accounts from brokerages. Before forming FreeDematAccount.in, Amit worked for a Demat account brokerage.