What is a demat account? What securities can I hold in my demat account?
Today, to buy and sell securities, brokers insist on having a demat account. Just as you open a bank account to hold money and make payments, similarly you need to open a demat account now to buy and sell securities in the financial markets. Today, all trades are settled in dematerialised form i.e in the form of electronic records rather than certificates. Physical securities carry the risk of being stolen, forged or fake, 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.
How does one convert physical shares into demat form?
If you are holding shares in physical form, it is advisable to convert them into dematerialised form. To get your shares dematerialised, you have to open a demat account and get into an agreement with a depository participant. You need to surrender your physical share certificates to the company which issued them, informing them and giving details of your agreement with your depository participant. On the basis of this, the company would cancel your certificates and register your shareholdings in the name of your depository participant as the registered owner of those shares and intimate this registration through a notice to your depository participant. On receipt of the aforesaid notice from the company, the depository participant would register you as the beneficial owner of those shares. As a registered owner, your depository participant has no rights of benefits from those shares. All rights would lie with you as the beneficial owner.
With whom can you open a demat account?
You can open a demat account with any depository participant (DP) which could be a bank or even a stock broker having the licence to do so depending on your convenience. A broker is separate 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 will just give you an account to hold those shares. It is not necessary for you to open a DP account with your broker. Your account can be different from that of the broker. Many brokers also offer you three-in-one trading accounts which link your broking, demat and bank accounts online, thus making it easier for you to trade. To view a complete list of registered depository participants, you can visit the websites of NSDL and CDSL.
What are the charges incurred in a demat account?
Various entities could levy various charges while operating a demat account. Broadly, there are three kinds of charges which a depository participant can levy. 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 your account and send you statements on a regular basis. The third charge is the transaction charge which is charged every time you sell a security, and request the DP to move it from your account to the broker's account.
