Last updated on October 27th, 2021 at 05:49 pm
Dematerialization is the process through which you can convert your physical share certificates into electronic forms. For this process, Demat Accounts are used. The investors have been largely relieved after the introduction of this account.
It is a kind of electronic storage wherein you can store your shares and securities safely. The regular investors in the stock market know how convenient it is to trade using a Demat Account.
However, there are many people who get confused about its functioning. Although it is very easy to use a Demat Account, it is always better to know how it works. For detailed information, click to know more.
It is better to use a Demat Account for managing your shares and securities electronically.
Why Do You Need a Demat Account?
Demat is the short form of “Dematerialisation”. It simply means converting the physical certificates of your shares and securities into electronic form so that they are easy to access and safely stored.
This idea was brought into existence by the National Securities Depository Limited (NSDL) after its establishment in the year 1996. Soon after its establishment, the concept of Demat Accounts was highly preferred by all the investors because it helped them to escape the cumbersome process of managing the shares physically.
The entire purpose of these accounts is to help you in the trading process. The physical certificates which were used back then could be easily forged, stolen, or lost.
The Securities and Exchange Board of India has also released guidelines as per which you cannot sell or buy shares in their physical form at the exchanges. It implies that the share certificates cannot be used for trading through the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange).
How Does Demat Account Work?
A Demat Account works more or less like a general savings account in a bank. There are many Depository Participants (DPs) in India, the entities which offer the service of these accounts and are legally affiliated to the NSDL. You can store your government securities, ETFs (Exchange Traded Funds), mutual funds, shares, and bonds, electronically in your Demat Account with your preferred DP.
When you purchase a bond or security, it is credited to your Demat Account and reflected in the account’s statement of holdings. Usually, the brokers credit the shares with a defined period of “T+2” which typically means trading days plus 2 days after it. Similarly, when you sell any of your holdings, it is debited from your Demat Account and the price of the sold item is credited to your linked bank account.
This is how easily you can trade using a Demat Account. No doubt, this electronic platform offers a splendid service in managing shares and securities easily.
How Many Participants Are Involved In The Process?
The entire process of trading in the stock market using a Demat Account involves three entities. They are:
1. Your Bank
It is mandatory for you to link your Demat Account with your personal bank account for monetary transactions. The money used to buy shares will be debited from your linked account. Once you will buy the security, it will be reflected in your Demat Account holdings.
2. Your Depository Participant (DP)
For opening a Demat Account, you need to consult a registered Depository Participant. It can be any non-banking financial entity, or an individual broker, or a bank. All the Depository Participants must be registered and authorized by the NSDL or CDSL. This is because your DP will handle the transactions of your Demat Account on your behalf. There are plenty of renowned DPs in India and you can choose any of them as per your preference.
However, analyzing the market thoroughly and going through all the reviews of the concerned parties is very important.
3. Major Depositories
In India, there are two major depositories that play a vital role in the Demat Account opening process. Also, these depositories are responsible for maintaining all the accounts. The DPS is just the intermediaries who connect these two majors with the account holders. You will only contact a DP for opening your account and looking after its transactions and holdings.
Charges Of Opening And Maintaining Demat Accounts
Most investors find it very difficult to understand the need and nature of service charges levied by the Depository Participants. Every financial institution that is authorized by the NSDL and CDSL has its own guidelines for maintenance fees and other charges.
The most common ones are:
1. Account Opening Fee
This is a one-time charge which you have to pay for opening a Demat Account. There are some entities that do not charge anything at all while some do. So, you can also open a Demat Account for free.
2. Annual Maintenance Charge (AMC)
This is an annual fee that you have to pay to your DP for the maintenance of your account. You need to pay this fee irrespective of the total number of transactions you make during the year. That is, you are liable to pay this fee even if you do not involve in any trading for a year. A few institutions are there that do not charge any AMC for the first year as a welcome offer you can say. The amount of this fee would differ depending upon the Depository Participant you choose because every entity has its own charges.
3. Dematerialisation/rematerialization Fee
Every time you will dematerialize your shareholding certificate into electronic form, a fee will be charged by your DP. The same goes if you convert your electronic recorder shares into physical certificates. There are few renowned DPs who charge a fee as per share certificate while there are some who charge the fee upon the value of the security.
4. Postal Charges
Every time you rematerialize your holdings, the physical certificates are posted to you for which a fee is charged by DP.
5. Custodian Fee
This is an annual fee which the DP would collect from you. This fee is directly paid to NSDL/CDSL.
The working of a Demat Account is very simple and easily manageable. You can simplify your trading process with the help of your account.