What is Demat Account?

Demat account is also known as a Dematerialized account. The primary

use of Demat account is to hold shares and securities in an electronic
format. It helps you in online trading like buying or selling shares, or
converting physical shares into electronic form. All the shares, mutual
funds, bonds, government securities, and other investments are saved in a
dematerialized account.  Also, through it investors can perform intraday
trades.
What is Dematerialization?
Dematerialization is the term used to define the process of transferring
physical certificates into electronic ones. Overall, it makes the documents
available round the clock and accessible at your fingertip. The main motto
of dematerialization is to avoid holding physical shares and help you with
seamless tracking and monitoring. It helps convert physical shares to
electronic form.
Why do you need a Demat account?
A demat account holds shares and securities, just like a bank holds the
savings of a person. It holds securities in dematerialized format or
electronic format. A demat account is necessary when an investor wants to
trade in securities on a delivery basis. If the investor just wants to trade in
futures and options, a demat is not necessary. However, all trades are
settled through a demat account, and hence it becomes mandatory to have
a demat account. It is necessary to store and monitor all financial
securities in one place.
Also, this account is much safer when compared to a physical certificate of
a share or financial security. There is no risk of it being lost or misplaced.
This account can be accessed from anywhere as it is online. Through a
demat account, one can purchase odd lots of shares, which wasn’t possible
through physical certificates. Moreover, shareholders holding shares in
demat format are eligible for the right issue, bonus issue, and dividends, if
any.

What is the Use of Demat Account?

Below are the four major features make you understand the need of a
Demat account: 

1. Lower Costs: Usually, investors need to spend on different

unexpected expenses when transacting with physical share
certificates such as handling cost, stamp duty and so on. You can
eliminate the costs of holding shares in the form of physical share
certificates by choosing a Demat account. You can also get to know
the exact amount of the transaction beforehand.
 2. Less Paperwork: Earlier, shares transactions used to happen
through certificates or physical receipts which used to incur a lot of
paperwork and used to slow down the trading activities. Nobody used
to be able to do any transaction without presenting their
certificates. It holds shares and securities in electronic form. Hence
making it easy to transact.
3. No-Risk: Trading through physical securities was always risky with
the threat of physical damage, loss, misplacement, or forgery. Demat
accounts in india eliminate all these risks and give you peace of
mind. 
4. Instant Transactions: Delivering physical certificates used to take
days even weeks sometimes due to the administrative system that
needed to be fulfilled. With the help of Demat account, you are
avoiding the waiting period as it offers instant transactions.

Different Types Of Demat Account

There are three types of demat accounts:

-   Regular demat account

-   Repatriable demat account

-   Non-repatriable demat account

1.   Regular demat account:
A regular demat account is needed for investors who reside within India. The account is
ideal for those who deal with equity shares alone. The shares one buys are stored in the
digital format in the account. The ones that are sold are taken from it. If you are planning to
trade in futures and options, there is no need to hold a regular demat account. This is
because futures and options come with an expiry date and, therefore, do not need to be
stored.

Recently, SEBI introduced a new type of deamt account called the Basic Services Demat
Account (BSDA). This is similar to a regular demat account, except that there are no
maintenance charges if the holding is within Rs 50,000. For holdings between Rs 50,000 and
Rs 2 lakh, the charges are Rs 100 per annum. The idea behind the launch of the BSDA was
financial inclusion and aiding investors who are yet to open a demat account but wish to
participate in the markets.

2.   Repatriable demat account:

This type of demat account is meant for non-resident Indians (NRIs). It allows the
transfer of wealth abroad. However, such types of demat account require a Non-
Resident External (NRE) bank account. After you become an NRI, you need to close
the demat account you had as a resident Indian. Once that is done, you can transfer
the shares to a Non-Resident Ordinary (NRO) demat account. If you wish to sell the
shares, a restriction on repatriation comes into force. You are allowed to repatriate a
maximum of USD 1 million during a calendar year (January–December).
3.  Non-repatriable demat account:
This type of demat account is again for the NRIs. However, you cannot transfer
funds abroad. You must also have an NRO bank account linked to the demat
account.

Is demat account mandatory?

Holding a demat account has been made mandatory by markets regulator Securities
and Exchange Board of India (SEBI). Unless you have a demat account against your
name, you cannot participate in the stock markets by buying or selling shares.

However, say, you choose to invest in mutual funds. This is another popular markets-
linked participation, albeit an indirect one. In this case, holding a demat account is
not mandatory.

Conclusion:
Demat accounts have been made mandatory for participating in the Indian stock
markets. There are different types of demat accounts that serve specific purposes.
For resident Indians, the process of opening a regular demat account is fairly simple.
It can be done through a broker of one’s choice. However, for NRIs, the rules are
different. Certain restrictions have been put in place for them. NRIs have to conform
to the rules of the Foreign Exchange Management Act which mandates them to open
slightly modified versions of demat accounts.
What is the Procedure for Opening a Demat
Account?
Here is the account opening process for a Demat account

1. Firstly, decide where you want to open the demat account. Then
choose a DP you want to open the Demat account with. You can find
many financial institutions and brokerages offering this service. 
2. Fill up the account opening form and submit it along with the copies
of all the necessary documents and a passport size photo. 
3. Have original documents handy for verification. 
4. You will receive a copy of the terms and conditions agreement. Go
through it. 
5. A member of DP will get in touch with you and verify the details you
have submitted. 
6. If the application is processed, you will get a Demat account number
along with a client ID which you can use for the account online.
 7. You need to pay some account opening charges such as annual
maintenance charge and the transaction fee (monthly basis). The fee
differs from one to another Depository Participant. Some DPs charge
a fat fee for each transaction while some charge a percentage to the
total transaction value. DPs also charge for converting shares from
physical forms to electronic ones, or vice-versa. 
8. There is no limit on the minimum number of securities to keep your
account active. 

Documents required for Demat account

While opening a Demat account online,  you need to submit your ID proof,
address proof and a passport size photo along with an opening form. You
will need to submit the photocopies of the documents required. Also, you
have to keep originals handy for verification. Here is the detailed list of
documents required that are accepted as proofs for opening a Demat
account online.
Proof of Identity

 Voter ID
 Pan Card
 Passport
 IT returns
 Bank Attestation
 Telephone Bill
 Electricity Bill 
 Any other ID card which has your photo, issued by state or central
government and other departments, regulatory or statutory
authorities, scheduled commercial banks, PSUs (public sector
undertakings), public financial institutions, or professional bodies like
ICSI, ICAI, bar council, etc. 

Proof of Address

 Passport
 Ration Card
 Driving License
 Voter ID
 Bank Statement
 Bank Passbook 
 Electricity Bill
 Telephone Bill
 Agreement for Sale
 Self-Declaration by Supreme Court or High Court Judges
 Document or ID card issued by State or Central Government and its
departments, regulatory or statutory authorities, scheduled
 commercial banks, PSUs (public sector undertakings), public
financial institutions, or professional bodies like ICSI, ICAI, bar
council, etc. 

ADVANTAGES OF DEMAT ACCOUNT

1. Safety and security - Elimination of loss or theft of shares

The most important advantage of a Demat account is the safety and security that it
offers. When financial assets were held in physical form, there was always a risk
of loss or theft of the share certificates. In a scenario of loss or theft, an investor
would have to go through a ton of paperwork and operational challenges to be able
to try and recover those assets. And even then there would be no guarantee of
recovery. Holding shares in Demat form is safer and more secure. There is a
negligible chance of theft or loss of assets when held in Demat form.

2. Faster and smoother settlements

Before dematerialisation, settlement of trade used to take 14 days due to the
physical movement of paper shares from the seller to the RTA to the buyer. But
with a Demat account, the settlement cycle has reduced from 14 days to 2 working
days, saving the investors’ time, effort and energy. It’s rightly said,’time is
money!’.

3. Reduction in errors
In the world of physical and offline settlements, due to the extent of manual work
involved, there were a lot of manual errors as well. These were often referred to as
“Vanda” trades or error trades. One of the biggest advantages of a Demat account
is that these erroneous trades have been significantly reduced.

4. Easy Transmission
Due to dematerialisation, in the unfortunate event of the death of a Demat account
holder, the ownership of assets held in the Demat account can be quickly
transferred to the next of kin. This is possible by either opening a joint Demat
account or by adding the next of kin as a nominee to the Demat account. This was
not possible when shares were held in physical form since the legal heirs had to go
through too much effort to claim rights on the financial assets of the deceased
Demat account holder. Easy transmission (transfer) of assets has been a major
advantage of Demat accounts.

5. Better liquidity and monetisation

Apart from easy transfer, another advantage of Demat account is that it facilitates
 easy liquidation of assets. You can easily liquidate i.e. sell, or take a loan against
shares, mutual funds etc if you are holding these financial assets in a
dematerialised form. Easy liquidation and monetisation is not possible when assets
are held in physical form.

6. Yields and returns v/s physical assets – E.g. gold

In addition to providing safety and higher liquidity, Demat accounts also help you
hold physical assets in dematerialised form. Recently, the Government of India
issued Sovereign Gold Bonds, which effectively gives an investor exposure to
Gold with an additional return of 2.5%. This works wonderfully in favour of
investors as they get the twin benefit of exposure to Gold as well as 2.5% annual
interest which is otherwise not received by holding gold as an asset in a physical
form.

7. Elimination of Odd-lot problems

The greatest advantage of a Demat account is that it has solved the odd-lot
problem. Earlier, physical shares used to be sold in lots but with the introduction
of Demat accounts, you can buy and sell even a single share.

8. One-stop storage for all assets

A Demat account not only stores your shares but also stores all your financial
assets such as debentures, bonds, exchange-traded funds, unit linked insurance
policies etc. An important advantage of a Demat account is that all the assets are
available under one roof, which makes for easy maintenance and tracking. It is
also helpful while filing taxes as all your records are maintained in one place.

9. Simplified Accounting and management

When financial assets are held in Demat form, all transactions get auto accounted
for by the depository participant. This makes reconciliation and management of
accounts extremely simple.

10. Central point for updating information

Earlier, any change in address, contact details or nominee details had to be
intimated to multiple companies. But with a Demat account, you can simply
inform your depository participant i.e broker of the change in KYC records and
the same will be rectified across all Demat accounts.
Disadvantages of a DemWhile Demat accounts have revolutionised the way securities are
traded in India, it does have certain shortfalls. Let us discuss the main disadvantages of a
Demat account.

1. Costs associated with a Demat account

One of the main disadvantages of a Demat account is the cost associated with
opening and operating a Demat account. Demat account costs include account
opening charges, transaction charges, custodian charges and annual maintenance
charges.
[ Suggested Reading:Demat Account Charges ]
While many brokers charge absurdly high Demat fees, Samco provides free Demat
account opening to its clients. Also, with Samco, the annual maintenance charge
for the first year is completely waived off. To further sweeten the deal, Samco also
provides 100% brokerage cashback for the first month. Unique features such
as StockPlus truly makes Samco the best Demat account in India.
[ Suggested Reading:17 Reasons Why Samco is the Best Demat Account in India ]

2. Dishonest brokers
Selecting an honest, fiduciary broker is akin to finding a needle in a haystack.
Many brokers indulge in proprietary trading i.e. they become the counterparty to a
client’s trade. But at Samco, we follow the highest standards of corporate
governance and ensure 100% transparency with 0% conflict of interest.

3. Constant portfolio churning

With a Demat account, trading is literally just a click away. This ease of trading
has resulted in constant buying and selling which affects the clients long-term
wealth creation goals. Earlier, investors used to practice coffee-can investing
strategy which is a ‘buy-and-hold’ strategy. But with Demat accounts facilitating
‘ease of trading’, many investors gamble in short-term trades instead of focusing
on long-term wealth creation.

4. Tech Savvy
While you do not have to be a technology expert, you do need to be tech savvy to
understand and operate a Demat account. Often, investors depend on their brokers
to put through a deal, which can lead to fraud or misappropriation of funds by the
broker.

Conclusion
While Demat accounts have their fair share of disadvantages, the positives outweigh the
negatives by a huge margin. Since a Demat account is a prerequisite to trading in the
stock market, instead of avoiding the stock market due to a few bad brokers, you can do
adequate research and open a Demat account with a reputed, fiduciary stockbroker in
India.