We all know about savings accounts with banks. It allows easy access to our funds while offering security from theft and mishandling. A Demat account does the same for investors. Nowadays, the Demat account is a prerequisite for stock investment.
Demat Account is an account that is used to hold shares and securities in electronic format. The full form of Demat account is a dematerialised account. The purpose of opening a Demat account is to hold shares that have been bought or dematerialised (converted from physical to electronic shares), thus making share trading easy for the users during online trading.
In India, depositories such as NSDL and CDSL provide Free Demat account services. Intermediaries, depository participants or stockbrokers - like FundzNest - facilitate these services. Each intermediary may have Demat account charges that vary as per volume held in the account, type of subscription, and terms and conditions between a depository and a stockbroker.
What is Demat account?
A Demat Account or Dematerialised Account provides the facility of holding shares and securities in an electronic format. During online trading, shares are bought and held in a Demat Account, thus, facilitating easy trade for the users. A Demat Account holds all the investments an individual makes in shares, government securities, exchange-traded funds, bonds and mutual funds in one place.
Demat enabled the digitisation process of the Indian stock trading market and enforced better governance by SEBI. In addition, the Demat account reduced the risks of storing, theft, damage, and malpractices by storing securities in electronic format. It was first introduced in 1996 by NSE. Initially, the account opening process was manual, and it took investors several days to get it activated. Today, one can open a Demat account online in 5 mins. The end-to-end digital process has contributed to popularising Demat, which skyrocketed in the pandemic.
What is dematerialisation?
Dematerialisation is the process of converting the physical share certificates into electronic form, which is a lot easier to maintain and is accessible from anywhere throughout the world. An investor who wants to trade online needs to open a Demat with a Depository Participant (DP). The purpose of dematerialisation is to eliminate the need for the investor to hold physical share certificates and facilitating a seamless tracking and monitoring of holdings.
Earlier, the share certificate issuance process was time-consuming and cumbersome, which Demat has helped transform by speeding the entire process and storing security certificates in digital format. Once your Demat account is active, you can convert paper certificates into digital format by submitting all your physical securities along with a Dematerialisation Request Form (DRF). Also, remember to deface each physical certificate by mentioning ‘ Surrendered for Dematerialisation’ on it. You will receive an acknowledgement slip when you surrender your share certificates.
Demat Account opening charges
Earlier, the banks used to charge anything between Rs 700 to 900 as opening charges. Despite the opening charges, the prospective investors were flocking towards them for opening Demat account because of the well-integrated banking network and investment services and easy stock market investment through the three-in-one account, that encompass trading as well as a bank account. However, nowadays the Demat account opening charges levied by the Depository Participant (DP) are either nominal or Nil. Brokerage firms and banks make it a point to offer it as an incentive for opening two-in-one accounts or three-in-one accounts. Such accounts make it extremely easy for beginners and casual investors to trade or simply invest in the stock market. All the transactions involving these accounts are seamless and integrated under one common platform. Broking firms, however, charges for the additional costs, if involved, such as stamp duty, GST or other statutory levies by SEBI.
Demat Account custodian fee (Safety charges)
Most of the Depository Participants (DPs) do pay the custodian fees as one-time charges to the depository, and a number of them do not levy any custodian fees from the investor for maintaining a demat account. DPs who charges custodian fees do it on a monthly basis. These charges depend on the number of securities that are held in a demat (otherwise known as a dematerialised) account. The charges normally are in the range between Rs 0.5 and Rs 1 for each ISIN (International Securities Identification Number). The DPs, i.e. your bank or the broker, do not charge any custodian /custodial fees for the ISIN for those companies that have already paid the one-time charges to the depository. Earlier most of the DPs did charge the clients for both credits and debits to their demat account. But nowadays utmost DPs only charge for the debits to your demat accounts.
Demat account annual maintenance charges
Like other charges, some of which are waived off, a Demat account holder will have to pay an annual maintenance charges (AMC) to the Depository Participant (DP) for the services rendered. Also known as folio maintenance charges, these charges are to be paid in advance and typically ranges from Rs 300 to 900 per annum. Some DPs may also charge quarterly fees, while others may charge a lifetime fee of over Rs. 2000 and above. However, with a number of DPs competing among each other to lure customers, many of them have waived off AMC charges for the first year and initiate billing from the second year only. The DPs under banks normally have differential rates of AMC. Those banks who offer three-in-one (demat, trading & savings) account generally charge lower as the mapping of the trading account is with the same bank's savings account. However, in a case when the mapping is with other bank’s savings account they charge higher.
Demat account transaction charges
The transactions that are happening in your Demat account is with the ultimate aim of making a profit out of it. Your DP, for its services in helping you earn money, charges a nominal fee as transaction charges. You will have to pay this per transaction fee each time financial securities comes in or goes out from your Demat account. However, most of the DPs charge it on a monthly basis. The transaction fees differ with DPs depending on the kind of transaction like for buying and selling. Usually, when you buy shares your Demat account gets credited. Similarly, when you sell shares your demat account goes debited. Some DPs only charge when the securities are debited while some others charge for buying and selling. Some DPs levy a charge either based on the number of transactions you have made or a flat rate for the entire month. Some tend to charge roughly Rs 1.5 for each share you trade.
Is Demat account a necessity for trading?
As per the Securities and Exchange Board of India (SEBI), the Regulator for the Securities market in India owned by Government of India, to trade in the stock market it is mandatory to hold a Demat account.
How does a Demat account work?
Demat account works just like your bank account. When shares are purchased money gets deducted and vice versa. The purpose of Demat account is to eliminate the risk of holding physical share certificates. When securities are purchased or sold it immediately gets reflected in the account, which holds shares and securities in an electronic form.
Should I necessarily dematerialise my physical certificates?
It is not compulsory for you to dematerialise your physical certificates. As per the Depository Act of 1996 you have an option to hold shares either in physical or dematerialised form.
