What is a demat account?
A demat account or a dematerialization account is an electronic safe or locker to hold your shares. Demat accounts can be opened with DPs or Depository Participants also known as your stockbrokers. The DPS can be a broker, financial institution, bank, or custodian. While demat accounts are opened and maintained by DPs they are managed by the Central Depositories Services India Ltd. (CDSL) or National Securities Depository Ltd. (NSDL). The depositories are responsible for the long-term holding of your shares and your stockbroker or DP has no control over the transactions or shares that pass through your demat account. Your DP is merely a go-between the account holder and the CDSL or NSDL. The depositories in turn are regulated by SEBI (Securities Exchange Board of India). As an investor, you don’t get to pick the depository your shares are held by. The DP chooses a depository that all its account holders’ shares are managed or gives the investor the option to pick the depository they want their stocks managed by.
How do you open a demat account?
Opening a demat account is done online in a few simple steps. In order to trade, purchase and sell shares, you need to have a demat account and trading account. Both of them serve different purposes. A demat account is used to hold shares in an electronic form whereas a trading account is an interface used to buy and sell shares online. DPs offer electronic KYC (Know Your Customers) forms. Most DPs offer the facility for both accounts and some even let you open both accounts together by streamlining the application process.
A demat account and trading account are linked to your bank account. This allows you to buy and sell shares through your trading account and hold them in your demat account for as long as you like. The demat account is essentially a bank for your shares. Before demat accounts were available, traders and investors held physical share certificates and had to transfer the physical copy of the certificate at the time of trading. Demat accounts enable an account to account transfer of shares that takes place entirely online.
Difference between demat account and trading account?
A demat account and trading account are both required to invest in the stock market. They work in tandem with one and another. A trading account is used for real time trades of shares and F&Os in the stock market. For intraday traders that don’t take delivery of securities, a demat account is not a hard requirement. For investors holding securities in the short or long term, a demat account is required. A single demat account can be mapped to multiple trading accounts. The demat account that holds your shares is managed by a centralized depository system. Shares and transactions conducted that pass through your demat and trading account are completely safe.
Having two demat accounts, one for your trading account transactions and one for long term investments makes sense. It helps bifurcate long term and short term investments.
Can we open multiple demat accounts in India?
It is legal to hold multiple demat accounts in India. In the same way that you hold multiple bank accounts, you can open multiple demat accounts and trading accounts in India. However, you cannot hold multiple demat accounts or trading accounts with the same DP or broker.
A few things to remember before you open more than one demat account
Holding multiple demat accounts is permitted by market regulator SEBI. You may choose to open multiple demat accounts for any number of reasons. But you should bear a few things in mind before opening more than one demat account.
1. You cannot open multiple demat or trading accounts with the same DP or broker.
2. Every time you open a demat account you have to pay Annual Maintenance Charges (AMC) and account opening charges. The AMC is applicable even if you don’t use the demat account to make a single transaction. The AMC charges vary between INR 700 -1000 annually, but across multiple demat accounts, even this small amount can add up.
3. Unused demat accounts can be frozen due to inactivity. The duration of inactivity post which an account is frozen depends on the DP. In case the demat account is frozen, in order to access it again you may have to fulfill your KYC obligations afresh.
4. Having multiple demat accounts is also beneficial. For many investors, operating multiple demat accounts allows them to segregate their investment portfolio and track investments more efficiently. On the flip side it can also make it difficult for you to track your investments if not organised properly.
5. Opening more than one demat account will not have implications on other financial holdings or the safe keeping of your shares. Your stock holdings across all demat accounts are in the hands of the depository and managed and secured by them.
One of the many benefits of holding multiple demat accounts is to be able to benefit from a range of research reports, trading products, platform interfaces, and brokerage services. Ensure that if you do open multiple trading accounts, you keep a pulse on the variety of data and insights being offered to you by your stockbroker.
There is nothing preventing you from opening multiple demat accounts in India. Before you ask can I open multiple demat accounts, question the rationale behind opening multiple accounts. The ease of opening multiple accounts can result in a web of demat accounts that leave you fed up with having to track the paperwork, invoices, and statements that accompany them. To leverage having multiple demat accounts you must interact with your brokers frequently and leverage the value-add services they offer you for maintaining accounts with them.