With growing financial awareness, more and more people now want to dabble in the share market.
To do this, one should understand the basic requirements to trade in shares.
A company enlisted in a stock exchange, is under obligation to offer the securities in both physical and dematerialized mode.
Physical securities mean actual certificates giving information about the shares of a company owned by a person.
In the same manner, Dematerialization is the process of converting physical shares (share certificates) into an electronic form.
Shares once converted into dematerialized form are held in a Demat account.
Today, almost all of the shares trading happens using the Demat mode of shares.
What is a Demat account?
Demat account allows you to buy, sell and transact shares without the endless paperwork and delays. It is also safe, secure and convenient.
Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, you need to open a demat account if you want to buy or sell stocks.
So it is just like a bank account where actual money is replaced by shares.
You have to approach the DPs (remember, they are like bank branches), to open your demat account.
Let’s say your portfolio has 100 of Satyam, 200 of IBM and 120 of TCS shares.
All these will show in your demat account. So you don’t have to possess any physical certificates showing that you own these shares.
They are all held electronically in your account.
As you buy and sell the shares, they are adjusted in your account.
Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.
Is a Demat account must?
Nowadays, practically all trades have to be settled in dematerialized form.
Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.
So a demat account is a must for trading and investing.
It is a safe and convenient means of holding securities just like a bank account is for funds.
The demat account
- reduces brokerage charges,
- makes pledging/hypothecation of shares easier,
- enables quick ownership of securities on settlement resulting in increased liquidity,
- avoids confusion in the ownership title of securities, and
- provides easy receipt of public issue allotments.
What are the features and benefits of Demat account ?
As opposed to the earlier form of dealing in physical certificates with delays in transaction, holding and trading in Demat form has the following benefits:
- It eliminates risks associated with forgery, counterfeiting and loss due to fire, theft or mutilation and reduces brokerage charges,
- Settlement of Securities traded on the exchanges as well as off market transactions,
- Reduces time taken to stock trading drastically avoiding problems encountered in case of physical shares like signature mismatch, postal delays and loss of certificates in transit,
- Enables quick ownership of securities resulting in increased liquidity,
- Easy settlement of the ownership title of securities, and provides easy receipt of public issue allotments,
- Pledging of Securities,
- Auto Credit of Rights / Bonus / Public Issues / Dividend credit through ECS,
- Auto Credit of Public Issue refunds to the bank account,
- No stamp duty on transfer of securities held in Demat form (as against 0.5 per cent payable on physical shares),
- Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time,
- It do away the requirements of filling up of transfer deeds,
- Change of address, Signature, Dividend Mandate, registration of power of attorney, transmission etc. can be effected across companies held in Demat form by a single instruction to the Depository Participant (DP),
- Holding / Transaction details through Internet / email.
Steps for opening a Demat account ?
As majority of shares trading happens through a Demat account, it is imperative that an individual dealing in shares has such an account.
The minimum age for opening a Demat account is 18 years. To open a Demat account, you must:
1) Choose a Depository Participant or DP (A Depository Participant can be a financial organization like banks, brokers, financial institutions, custodians, etc., acting as an agent of the Depository to make its services available to the investors)
2) Fill up an account opening form provided by DP, attach relevant documents, and sign an agreement with DP in a standard format prescribed by the depository
3) The DP provides the investor with a copy of the agreement and schedule of charges for his future reference
4) DP opens the account and provides the investor with a unique account number, also known as Beneficiary Owner Identification Number (BO ID)
Documents Requirement for opening a Demat account ?
Pan card is mandatory for opening a Demat account (effective from April 01, 2006)
Charges applicable (vary from DP to DP):
Account Opening Fee
Annual Maintenance Fee
Similar to a bank account a Demat account may be closed after a period of inactivity.
Check with the DP about the period and the charges associated with reactivating it.