What is a Demat Account? – Types & Benefits of Demat Account

Introduction to Demat Account

What is a Demat Account? If you are a beginner in the stock market and are wondering what a Demat account is, then don’t worry, you are not alone. Every month, nearly lakhs of individuals ask this very question – What is a Demat Account? Some follow up questions include, ‘what is a trading account?’ what are the different types of Demat accounts?’, ‘what is the difference between Demat account and trading account? And the list goes on.

As a stock market beginner, the formalities of the market might seem tedious or even annoying to you. But nevertheless, you must know how to open a Demat account. Why? Because you cannot invest in the stock market without a Demat account. So, let us understand what a Demat account is and how a Demat account works in enabling you to create wealth in the stock markets.

What is Demat Account and How to Open Demat Account?

Watch this video to understand what is a Demat Account

A bank account stores your cash and other assets like fixed deposits, recurring deposits etc. right? In the same way, a Demat account is a digital locker (tijori) which stores your financial assets in ‘electronic’ form. A Demat account stores assets like shares, bonds, mutual funds, exchange traded funds (ETFs) etc.

The term Demat, is short for Dematerialisation account. What is Dematerialisation? It is the process of converting physical shares into electronic form. You see, Demat accounts were introduced in India in 1996. Before that, physical share certificates were bought and sold among investors.

So, suppose you bought 100 shares of Reliance Industries Ltd in 1992. The company would send you actual physical paper shares. If you then wanted to sell these shares, you had to give physical share certificates to your broker who would then look for a buyer. Once sold, the broker would hand over the physical share certificate to the buyer and the money would be credited to your account. So, before Dematerialisation, you could actually hold shares in your hands!

But naturally, this process is time consuming, prone to theft, loss, fake certificates, and not scalable. Can you imagine the courier charges a seller sitting in Punjab will incur if he is selling his stocks to a buyer from Chennai? Huge! It’s no wonder then that before Demat accounts, the settlement cycle used to take 14 working days!

But everything changed in 1996 as Indian markets adopted ‘Dematerialisation’. With Dematerialisation, the settlement cycle reduced from 14 to 2 working days. Demat account has made trading in the stock markets scalable. The reach of the stock market increased. Today, a person sitting in even the remotest village in India can trade in the stock market through a Demat account.

What ‘securities’ can be stored in a Demat account?

A lot of novice investors believe that a Demat account is only for storing shares. This is not true. You can also hold the following assets in a Demat account:

What is Trading Account?

This is another area of confusion for novice investors. Demat and trading account are not the same. A trading account is used to buy and sell securities whereas a Demat account only stores your securities. You cannot buy or sell shares using a Demat account. To buy and sell shares, you compulsorily need a trading account. Let us understand the difference between Demat account and trading account with this simple example.

You go to a shoe shop to buy new sneakers. You try them on and decide to buy them. As you head to the payment counter, the salesman shouts, ‘Chotu packed piece de’. And a packed box falls from the sky! (The overhead godown). Observe that the buying and selling takes place in the shoe store. But the actual shoes are stored in the godown. Every time a customer buys a shoe, a new box is given from the godown.

[ Read More: Demat Account Vs Trading Account ]

In this example, the godown is your Demat account and the shoe store is your trading account

Now at this point, you might have a few questions about Demat and trading account. Let us answer them one by one.

Can you only open a Demat account?

Yes, you can open a Demat account without opening a trading account. But this should be done only if you never plan to sell your stocks. So, if you only buy stocks and are sure that you will not sell them for 10 or 20 years, then you can only open a Demat account, without a trading account.

Can you only open a trading account?

Yes, you can only open a trading account without opening a Demat account. But in that case, you can only trade in the Futures & Options (F&O) segment as they are cash settled. Without a trading account, you cannot conduct intraday trading. Though not compulsory, it is recommended to have both Demat and trading account with the same broker for easy share trading and settlement.

Can you open multiple Demat accounts?

Yes, absolutely! There is no restriction on the number of Demat accounts that you can open. But remember, that you need to pay separate annual maintenance charges for each Demat account you hold.

[ Read More: All About Demat Account Charges in India ]

Now that you understand what a Demat and trading account is, let us look at the various participants which help in efficient functioning of a Demat account. All the Demat accounts in India are maintained by depositories.

Tips for Maintaining a Demat Account

Here are some useful tips to maintain your demat account and make the most of it:

• Review Your Demat Account Maintenance Charges

  Compare your current fees with other providers to know if you are getting the best rates in the market. Some brokers offer discounts for high-value accounts or frequent traders. If you belong to this category, you can opt for such accounts to potentially reduce your costs.

• Keep Your Account Active

  Your demat account may become inactive or dormant if you do not make any transactions using the account. While your securities will remain safe, you may have to pay additional fees to reactivate the account. To avoid this, make at least one transaction annually. This will also make the demat account maintenance charges paid worth your while.

• Opt for Digital Statements

  This not only reduces paper wastage but can also make it easier to monitor your transactions. Some brokers may offer discounts for choosing paperless options too, thereby contributing to both cost savings and environmental conservation.

• Consolidate Multiple Demat Accounts

  Maintaining several demat accounts can lead to higher cumulative demat account maintenance charges. By consolidating them, you can potentially reduce fees and simplify your portfolio management.

• Know the Latest Regulations

  Understanding the rules governing demat accounts and the charges thereon can help you identify any discrepancies or unfair practices. Don't hesitate to raise concerns with your broker or regulatory authorities if needed.

What are Depositories?

A Depository is an entity like your bank. All your securities (shares, bonds etc.) are stored safely with these depositories. The main role of depositories is to transfer securities from one Demat account to another. This is similar to you transferring money from one bank account to another. Like a bank has branches, depositories have Depository Participants (DPs).

The two main depositories in India are:

NSDL is one of the largest depositories in the world. It was established in August 1996 under the Depositories Act of 1996. NSDL has 276 registered depository participants (DPs) with nearly 2.70 crore active client accounts. NSDL’s total Demat custody value is a whopping Rs 2,93,20,536 crore.

What is a Depository Participant?

Your broker is your Depository Participant. As an investor, you cannot directly approach NSDL or CDSL to open a Demat account. You can only open a Demat account with your broker. He acts as the vital link between you and the depository.

Samco Securities Ltd. is one of the most popular depository participants in India with more than 2.5 lakh clients. A depository participant helps you buy and sell shares using a Demat and trading account.

What are the Types of Demat Accounts in India?

There are 3 main types of Demat accounts in India. This bifurcation is based on whether you are a Resident Indian (RI) or a Non Resident Indian (NRI).

Regular Demat Account: This is the most common type of Demat account in India. This Demat account can be opened by all resident Indians. You can open a regular Demat account in either single or joint holding. If you open a joint Demat account, then it cannot be in ‘either or survivor’ mode. A maximum of three holders are allowed to open a joint Demat account.

You can also open a Demat account in the name of a minor (person below 18 years). Either of the parents can act as the guardian. But the account must be converted into ‘major’ or single account once the child becomes a ‘major’. Learn how to open a minor Demat account in India.

Repatriable Demat Account: A Repatriable Demat account allows you to transfer funds to foreign countries. This is perfect for NRIs who want to participate in the Indian markets but take profits or earnings overseas.

To open a Repatriable Demat account, you will need an NRE bank account. Repatriable Demat accounts are governed by the Foreign Exchange Management Act (FEMA). All brokers do not provide Repatriable Demat accounts. They can be opened with only authorised brokers specified by the Reserve Bank of India (RBI).

Non Repatriable Demat Account: A Non Repatriable Demat account is also for NRIs. But you cannot transfer funds back overseas. To open a Non Repatriable Demat account, you must have a Non Resident Ordinary (NRO) bank account.

[ Read More: Learn How to Open a Demat Account in 3 Simple Steps ]

These are the three main types of Demat accounts in India. But there is a special type of Demat account called ‘Basic Services Demat Account (BSDA). BSDA is a type of Regular Demat account but it carries no or low annual maintenance charges (AMC).

Only individuals fulfilling the below criteria can opt for BSDA:

How Does a Demat Account Work? – Demat Account & Trading Account

These are questions that majority of investors have when they start trading. The rule is simple: ‘You CANNOT buy or sell shares using a Demat account’.

For example: Let’s say you subscribed to an IPO and received 100 shares. These shares will be ‘stored’ in your Demat account. After a month you want to sell these 100 shares. But you do not have a trading account. Will you be able to sell these shares? No.

You can buy or sell shares ONLY through a Trading account. A Demat account merely acts as a ‘locker’ for your securities.

Demat and Trading Account Flow – Placing a Buy Order

Let us understand how Demat and trading account works when you place a buy order.

This is how a Demat account works when you buy shares. The process might seem complicated, but it works like a well-oiled machine. The order matching takes place in seconds.

Remember, Ram uses his ‘trading account’ to buy shares but the stock exchange ‘stores’ (credits) shares in his ‘Demat account’. The same process will happen for the seller as well.

Demat and Trading Account Flow – Placing a Sell Order

Let us look at how Demat account works in case of a SELL order.

Buyer	Seller
Demat account credited with shares	Demat account debited with shares
Trading account debited with cost of shares	Trading account credited with sale price

We hope this clears any queries you might have on how Demat and Trading account works. Let us now understand the advantages and disadvantages of a Demat account.

Why should you open a Demat account? – Top 10 Advantages of Demat Account

The short answer is because you cannot participate in the stock markets without a Demat account. Yes, as per Securities and Exchange Board of India (SEBI), a Demat account is mandatory to trade in the Indian stock markets. The other benefits for opening a Demat account are:

Should you open a Demat Account? – Major Disadvantage of a Demat Account

Who can open a Demat Account?

Any individual above the age of 18 years can open a Demat account. Even a person of Indian origin (PIO) currently a citizen of any country except Pakistan and Bangladesh can open a Demat account. Additionally, even a Hindu Undivided Family (HUF), and domestic Indian companies can open a Demat account. In the case of a HUF, the Demat account can be opened in the name of the oldest male member or karta.

How to Open a Demat Account? – A Step-by-Step Guide on How to Open a Demat Account in 2024

Step 1: Select a broker

By now you know that a Demat account can be opened with a broker, also known as a Depository Participant (DP). The Indian markets are flooded with brokers. But before selecting a broker to open a Demat account with, you need to ensure the following:

[ Read More: Do’s & Don’ts of an Effective Demat Account ]

Once you select the broker, the next step is to compile the documents required to open a Demat account.

Step 2: Documents required to open a Demat account

The following documents are required to open a Demat account.

Step 3: Fill Demat account opening form

Fill the Demat account opening application form and submit the above mentioned documents. In 24-48 hours your Demat account will be active. Brokers like Samco Securities offers 3-in-1 account. So, you get a Demat, Trading and Mutual Fund account at the cost of one!

Step 4: Fund your Trading Account

Once your Demat account is opened, you need to fund your trading account (linked to your bank account) and start trading! It’s as simple* as that.

*Simple: Many traditional brokers still insist on physical forms and visiting their office for in-person-verification. The account opening process can take days. It is recommended to avoid such brokers and open a Demat account with a discount broker like Samco Securities which helps you open a FREE Demat account with 0% paperwork under 5 minutes.

Frequently Asked Questions about Demat Account