Demat account is short form of dematerialised account. Demat account is similar to a bank account where real money is replaced by shares. Just like a bank account is required to save money or make cheque payments, we need a demat account in order to buy or sell shares. A Demat Account holds portfolio of shares in electronic form and removes the need of holding shares in physical form. The account offers a secure and convenient way to keep track of shares and investments without the hassle of handling physical documents that get mutilated or lost in transit.
Let’s assume you have 100 shares of ICICI bank, 50 shares of Axis Bank, 100 shares of SBI. These shares will be shown in your demat account and you can trade them at any time without any physical paperwork or delivery through exchanges like NSE and BSE.
Is it necessary to have a demat account?
The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading involving more than 500 shares.
Main Benefits of Demat Account
- Reduces brokerage charges
- Eliminates risks associated with physical certificates such as bad delivery, fake securities, delays, forgery, counterfeiting, thefts and loss due to fire.
- Reduction in paperwork involved in transfer of securities
- Enables quick ownership of securities on settlement thereby resulting in increased liquidity
- There is no odd lot problem. Even one share can be bought or sold.
- Demat account obviates the need to pay stamp duty (in case of physical shares, 0.5 per cent stamp duty is payable).
- Pledging/Hypothecation of shares is easier
How to open a Demat Account
You can open a demat account with a bank or a depository participant (DP). Banks usually give preference to those customers who have a savings or current account with the bank. Most of the banks provide demat accounts to their customers. However, banks usually charge higher brokerage than the regular brokerage houses. Following documents are required to open a demat account:
- Identity proof
- Address proof
- Copy of PAN card (mandatory)
- 2-3 Photographs of the applicant.
- Cancelled MICR cheque for bank account linking
How to dematerialise physical shares
For dematerialization of physical share certificate(s) you have to first fill the demat request form (DRF). The form can be obtained from the DP with whom your demat account is opened. Deface the share certificate(s) by writing across Surrendered for dematerialisation. Submit the DRF & share certificate(s) to DP. DP would forward them to the issuer. After dematerialisation, your depository account would be credited with the dematerialised securities. It is quite a simple process and is taken care by most of the good brokerage houses.