Why do you need to open a Demat account?

Want to invest in shares and stocks, ride the market?

Although mutual funds are among the most popular ways to invest in shares and equities, many investors prefer to deal in shares and stocks directly. And they do it through their demat accounts.

Demat account functions as a storing account to hold your investment securities in electronic format.  Not only in India, traders worldwide trade through Demat account. Introduction of Demat added to market transparency - helped better regulation and safeguarding general investors from stock market frauds. The system attaches unique identification with your stocks so that each transaction involving the stock can be tracked and monitored.  

What is a demat account?

Earlier, trading and investing in shares in the stock market meant that you owned the actual physical shares. But dematerialisation of shares – the change from paper shares to electronic accounts – 'demat'', changed all that. Demat accounts are where equity and other securities are held by investors, ending the hassle of signature mismatches, inadequate delivery systems, storing share certificates, losing share certificates, and wasted time. Secure ownership and fast, and smooth transactions are among the benefits of Demat accounts.

Since demat accounts came in 1997, the investing public has been steadily dematerialising shares. Today, all transactions of shares are done only in the demat mode through debits or credits to a demat account. And the number of new demat accounts has hit record highs this past year, testifying to the popularity of this investment vehicle.

So if you are considering investing directly in the share market, you must consider opening an online brokerage or Demat account.

Where to Open a Demat Account?

To invest online and open a Demat account you need a Depository Participant (DP) - which could be a brokerage or your bank. Brokerages, of course, are specialised institutions dealing in these transactions. You open the account by registering online at any of the leading broking firms.

While you open a Demat account with the DP, the actual shares are held in custody by one of the national depositories National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL). Each depository participant is a member of either NSDL or CDSL. Also remember, a Demat account can only hold shares in custody, to buy and sell shares. To invest, you will need a trading account.

There are two types of broking firms -- discount brokers or service brokers. The two differ primarily in the range of products and services that they provide. A discount broker typically acts as a functionary, carrying out trades as per an investor's instructions, and offers equity and derivatives as products.

Service brokers, on the other hand, in addition to the above, offer research and advisory services to investors, and a broader range of investing options that include initial public offerings (IPOs), mutual funds, and insurance, taking away much of the hard work of research and continuously tracking how your shares are doing or how the market is performing. Most leading broking firms such as Angel Broking are service brokers.

Difference between NSDL and CDSL: Custodians of stocks 

When you are opening a Demat, you must have a clear understanding of the role of depositories as Demat account and despositories are closely related. 

NSDL and CDSL were created through law. NSDL was established in 1996 and CDSL in 1999. Although both of them function as the custodian of stocks, debentures, mutual funds that you are buying, they have certain differences. If you are investing, it is essential for you to learn the difference between the two entities to understand the stock market better. 

We have two stock exchanges, NSE or National Stock Exchange and BSE or Bombay Stock Exchange and one depository is attached to one bourse. For example,  NSDL is the depository for NSE and CDSL is for BSE. 

NSDL and CDSL are different in terms of promoters, exchange, and even in the number format of Demat account, here is how,

Exchange: One depository is linked to one exchange. NSDL is the primary depository for the NSE, and CDSL is for BSE. But the exchanges can use either of the two repositories for trading and settlement of securities. 

Promoter: IDBI Bank, Unit Trust of India, and NSE are the promoters of NSDL. But CDSL is promoted by BSE only. Also, in terms of years in action, CDSL is junior to NSDL.

Demat account format: There is a difference in the Demat account format of NSDL and CDSL. A CDSL Demat account is a sixteen-digit unique number issued to you when you open an account. But Demat account from NSDL contains alpha-numeric formation, containing ‘IN’ followed by 14 digit Demat account number.  

When you open a Demat account, the DP sends account details containing Demat account number and other details through an email. From the details provided, you can confirm whether you have an NSDL or CDSL account. At Angel Broking, we open your Demat with CDSL, means that your Demat is a sixteen-digit account number. 

Apart from the differences mentioned above, there is no difference in functionality between the two depositors.  

How to Choose Your demat Partner

The choice of a broking firm depends on your preference - if you are looking for a seamless and secure way to deal in shares, a reputed service brokerage firm like Angel Broking is ideal.

For first-time investors, identifying the right broking firm requires some research and planning. Some basic questions need to be answered by the broking firm's website:

- How long has the broking firm been in business? Does it have a reputation for trust?

- What services do they provide? What kind of broking firm is best suited to your needs and preferences?

- Are they accessible online and via mobile apps?

- How competitive are their fees? What kinds of cost or discounts do they have for first-time investors?

- Are there proper linkages between your Demat account and your bank account?

- Is there a common depository facility - does the broking firm offer a single-window to trade more than shares, such as bonds and government securities or mutual funds?

- Does the broking firm offer good analysis, market insight and real-time information and alerts?

In addition to the questions above, pay special attention to the following criteria.

Nature of the DP: We are aware of two primary types of DPs – full service and discount brokers. A discount broker generally provides only buying and selling services on stocks. The kind of DP you choose plays the primary role in deciding your stock market experience.

Fees and Charges: There are certain fees and taxes levied on the Demat. But apart from that, the broker may have internal fees, account maintenance charges, and fees for carrying out trading instructions that will add to the total cost of maintaining a Demat. To avoid getting surprises later, it is always a good idea to thoroughly read the terms and conditions before opening a Demat.   

Customer Support: Have you thought of who to approach if you face any Demat and trading account related issues? The kind of customer support your broker will provide is an important metric to consider.

Trading Technology: Most traders would now offer an online trading facility that allows you to trade remotely. While choosing a brokerage for Demat account opening, you must consider if their trading system integrates seamlessly with your Demat and trading account for smooth trading experience.  It is important to have a user interface that is rich in features, clutter-free, user friendly, and responsive.  

Features: Not all brokers offer the same features which make it a critical metric to consider. Some of the features that you must consider are the following 

- Real-time stock feeds

- Bid and ask spread

- Facility to customise watchlist

- Quick access to analysis and market reports 

- Portfolio updates and synopsis

Opening a demat Account Online

Once you have answered these questions, opening a Demat account online with a leading broking firm is quite simple.

  1. You have to fill and submit your broking firm's account opening form along with KYC details: Date of Birth, PAN card, Email Address and Bank Account.
  2. The DP's KYC form will have a DP-Investor agreement. This spells out the rules and regulations, investor rights and obligations. You must read the fine print in detail.
  3. Typically, the firm will send you an OTP on your registered mobile number. Details of your Demat account are sent to you on your registered mail address.
  4. Many firms will require in-person-verification (IVP), this can be done by personally visiting a branch or a have a DP representative will visit your place.
  5. You get a demat number once your documents are verified

Investing in shares is one way to secure your financial future provided you have the basics covered. The basics start with opening a Demat account with a DP - bank or broking firm. Identifying the right DP, knowing where to open your Demat account -  where to park your trust and your money is the key.

FAQ's

Is it necessary to close Demat account?

If you have multiple Demat accounts, inactive or zero balance, it is a good idea to close them because Demat accounts attract annual charges and maintenance fees, which will increase your cost. Also, you can combine multiple accounts into one and close the rest.

What happens if I don’t close my Demat account?

If you don’t close a Demat account, the following will happen
  • The account will keep accumulating AMC and other charges
  • After some time, with no activity, the broker will declare the account inactive. Then to use it again you will first have to pay reactivation fees
  • The broker will keep sending you reminders through emails and SMS to activate the account and pay charges
  • The broker will hold the account forever and may prevent you from opening another Demat
  • Is money safe in Demat account?

    Yes, securities stored in a Demat account are safe from theft or damage, but you must remain watchful against any Demat account fraud. Both the depositories (CDSL and NSDL) and the brokers will send you periodic updates on your Demat account, keep checking those to prevent Demat account fraud in your account.

    When Demat account become dormant?

    The policy to declare a Demat account dormant vary between the brokers. But if there is no activity in the account for a stretch of time, the DP will declare it inactive and prevent transactions. You will have to pay reactivation fees to use a dormant Demat account again.