Previously, trading and investing in stocks used to be hectic and time-consuming as investors had to use paper certificates. However, SEBI broke this notion by introducing Demat accounts in 1996, which eliminated the risks of theft and damage of securities.
Are you planning to open a Demat trading account but need help knowing where to start? Read this article for a step-by-step guide to opening an online Demat account.
What Is a Demat Account?
The term ″Demat″ comes from its longer word ″dematerialisation″. Dematerialization is a process of converting physical securities to electronic format. A Demat account holds dematerialized securities in a similar way to a savings account which holds money. With a Demat account, you can participate in the hassle-free and instant transfer of physical securities.
The Securities and Exchange Board of India (SEBI) introduced Demat accounts to revolutionise the trading system. These accounts led to the full digitalization of India’s trading system by storing securities in electronic format. Since 2019, SEBI has made Demat accounts mandatory for buying or selling shares.
Demat accounts offer a convenient, paperless, and user-friendly experience to traders. Traders or investors can also hold ETFs, mutual funds, and bonds in digital format on their Demat account.
How Does a Demat Account Work?
Every investor and trader must possess a Demat account to participate in the trading of stocks. Following are a few basic terms you must know to understand the working of a Demat account.
- Unique ID
Every trader receives a unique identification number for their Demat account. SEBI has mandated the allotment of a 16-digit number as a unique ID for investors.
The unique ID plays a crucial role during buying and selling of shares. While investing, shares are credited or debited from an investor’s Demat account using this ID.
- Portfolio Holding
A Demat account acts as a holding account for a trader and records their transaction history. Whenever a purchase or sale of stock takes place, the portfolio holding automatically updates itself.
- Central Depository
India houses two depositories to hold Demat accounts. They are National Security Depository Limited (NDSL) and Central Depository Service Limited (CDSL).
- Depository Participant
Depository participants (DP) are bridges or intermediaries between your Demat account and the Central Depository. In simple terms, traditional banks, brokers, and other financial institutions play the role of depository participants.
Demat accounts work in a similar way to bank accounts. You need to link your Demat account with a trading account and a bank account for ease of trading. When you place a ‘buy’ order using a trading account, your DP forwards the order to the stock exchange, which matches the request with a corresponding ‘sell’ request.
Once the order is matched, the stock exchange settles the trade, and the shares you bought get credited to your Demat account. For a ‘sell’ order, the shares you have sold are debited from your Demat account, and its proceeds are sent to your bank account.
How Can You Open a Demat Account?
You can easily open a Demat account from the comforts of your home. The actual steps for opening a Demat account may vary between different brokers. However, we have noted the basic procedure that you need to follow to open a Demat account.
Step 1: Look out for a Depository Participant
Search for depository participants and choose with whom you wish to open a Demat account. Consider researching the reputation of your preferred DP before opting for a Demat account.
Step 2: Visit the Website or App of Your Depository Participant
After choosing a DP, visit its website or download its app on your smartphone. Enter your email ID or mobile number to generate an OTP. Complete the login process by entering the OTP.
Step 3: Fill up the Application Form
You will receive an online account opening application form to initiate the Demat account opening process. Start filling in this form by entering your basic details. This includes your name, email address, phone number, and PAN card details.
Step 4: Upload the Required Documents
After submitting the account opening form, you will be asked to upload scanned copies of certain documents. Browse the website of your depository participant to learn about the documents required.
Step 5: e-KYC or Verification Process
Nowadays, you do not need to wait for agents to arrive at your place for the in-person verification process. Most DPs will ask you to record a video of yourself reading the details of your PAN or Aadhaar card. Submit this video to complete the e-KYC process.
Step 7: Digital Signature
Most DPs provide an option for digital signature as a self-attestation process. Use your Aadhaar-linked mobile number to sign the document.
Step 8: Receive the Unique ID and Other Details
After completing the application and verification process, your Demat account will be created shortly. Following this, you will receive details like account number and login credentials to access this account.
Things to Remember before Opening a Demat Account?
Following are certain things you must consider before opening a Demat account.
- Link Demat Account to Trading Account
A Demat account is non-functional without a trading account. Therefore, you should link your trading account to your Demat account or opt for a platform that offers both accounts.
- Credible Brand Name
While researching for a depository partner, look for a reputed and credible brand name to open a Demat Account. Additionally, ensure that the platform is registered under SEBI.
- Brokerage Fees
You also need to check the brokerage fees before opening a Demat account, as this will be a long-term engagement. A Demat account with high brokerage fees may reduce your profits considerably over a long time.
To conclude, traders must conduct thorough research on the features and benefits offered by different trading platforms before opening a Demat account. Furthermore, if you are stuck during a trading procedure and require urgent assistance, connect with the support team of your respective platform.
Frequently Asked Questions
Can NRIs open Demat accounts in India?
Yes, NRIs are able to open Demat accounts with Indian brokerages. However, they can only use certain accounts for banking transactions. Repatriable and Non-Repatriable are two types of Demat accounts available for NRI traders.
What documents do I need to open a Demat account?
You need documents like a PAN card, passport-size photos, an Aadhaar card, a cancelled cheque, bank statements etc to open a Demat account in India.
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 7+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert.
He has previously worked for Khaitan & Co and Scripbox.