A demat account is basically where you hold any shares that you purchase in either an electronic or dematerialized form. It acts like a bank account that stores all of your shares. Instead of money, it holds the various certificates of your various financial instruments such as exchange-traded funds (ETFs), mutual funds, bonds, shares, and government securities. A demat account is required to partake in any form of trading or investing because all trades have to be settled in a dematerialized format. Even in a physical form, there is a maximum limit of 500 shares that can be settled as per the Securities and Exchange Board of India (SEBI). Before opening a free demat account, however, it is a good idea to understand exactly how It functions.
How it works:
The first thing to understand is that all demat accounts are held by the central depositaries. In India, it will be in either the CDSL and the NSDL. Like banks, they hold all details of your shareholding on your behalf. The access to these central depositories is made available through the Depository Participants or DPs. They can be either banks, brokers or financial institutions that offer services to open a demat account with them. Most discount brokers are included in the same. By opening a demat account with these DPs, you get unique access to the central depository.
Every single demat account is identified by a unique number that is provided for any transaction made. This is the number by which any exchange or company identifies you and credits the shares to your account. Since all the securities you own are stored within the demat account, you can see your portfolio holding and all related details any time you check your account. Each time any transaction is carried out, either buying a security or selling it, the details are updated to your account immediately.
Opening an Account
Most discount brokers offer free demat accounts whenever you begin using their services. The steps to open an account are simple.
- Firstly, choose the broker with whom you wish to open the account
- Next, you are required to fill up an account opening form. The copies of required documents and a passport-sized photograph should be submitted along with the account opening form. The originals of these documents and a PAN card should be carried as well.
- Generally, an In-Person verification process is carried out. A member of the staff from the DP will be in contact with you to recheck the details submitted in the account opening form.
- You are provided with the relevant account number or client ID once the application is processed. Once you receive these details, you can access your demat account online at any time for your transactions.
- There is no need to keep any minimum balance in your account. Therefore, a demat account can be opened without any balance of shares.
- There may be some fees like the annual maintenance fee and the transaction fee. Most discount brokers charge a nominal flat fee per transaction.