Demat refers to a dematerialised account. Just as we open a bank account to hold money and make payments, we need to open a Demat account now to buy and sell securities (listed stocks), ETFs as well as debentures in the financial markets.
Demat account is a requirement stipulated by SEBI for individual Indian Citizens. In the Demat account, shares and securities are held electronically instead of the investor taking physical possession of share certificates. Whenever an investor registers with an investment broker or sub broker, a Demat Account is opened by him/ her and the Demat account number is quoted for all transactions to enable electronic settlements of trades to take place.
The account is accessible on internet and all trades are settled in dematerialised form i.e. in the form of electronic records rather than certificates.
The physical securities carry the risk of being stolen, forged or faked, and hence, it is necessary for investors to trade in Demat form.
A Demat account can be used not only to hold shares, but also mutual funds, debentures and exchange-traded funds (ETFs). Hence, it is essential to have a demat account.
Conversion from Physical certificates to electronically records is advised. The investor who has physical certificates has to open a Demat account and then get into an agreement with a depository participant (DP).After this agreement, the investor surrenders the physical share certificates to the company which issued them, informing them and giving details of his/ her agreement with depository participant.
On the basis of this, the company cancels his / her certificates and registers his/ her shareholdings in the name of his/ her depository participant as the registered owner of those shares and intimate this registration through a notice to the depository participant. On receipt of the aforesaid notice from the company, the depository participant would register the investor as the beneficial owner of those shares.
What is a depository participant?
A depository participant can be a bank or even a stock broker having the licence to do open demat account depending on convenience of the investor.
Please note that a broker is different from a DP. A broker is a member of the stock exchange who buys and sells shares on his behalf and on behalf of his clients, though he could also hold a licence to provide depository services.
A DP just gives an account to hold those shares. It is not necessary for an investor to open a DP account with broker.
The account of an investor can be different from that of the broker. Many brokers also offer three-in-one trading accounts which link your broking, demat and bank accounts online, thus making it easier for investors to trade.
Charges on Demat Accounts
There are three kinds of charges which a depository participant can levy on Demat accounts. The first is an account opening charge, which also covers the cost of the agreement with the depository participant. The second is the annual maintenance charge to maintain the account and send the statements to investors on a regular basis. The third charge is the transaction charge which is charged every time an investor sells a security, and request the DP to move it from his/ her account to the broker's account.