According to the National Securities Depository Ltd. (NSDL), “Dematerialization is the process by which a client can get physical certificates of securities converted into electronic balances”.
An investor intending to have to trade in dematerialized securities needs to open a demat account with a depository participant (DP). There are two aspects to a demat account. You can dematerialize your physical shares by submitting the DRF or you can directly buy and sell shares in demat form through your demat account.
All purchase of securities are credited to the demat account while sale of securities are debited to the demat account. Bonuses and split shares are automatically credited to the demat account.
Why is it important to have a Demat Account?
If you want to trade in equities then a demat account is a must. What do we understand by a demat account? Let us look at demat account as the equivalent of a bank account for your stocks and shares. Just as you keep your money in your bank account, you can keep shares and stocks in your demat account.
A Demat account is a digital platform for holding your shares. Today, you can not only hold stocks but also bonds, mutual funds, gold bonds, government debt as well as insurance policies in your demat account.
When you buy shares in your trading account, your demat account gets credited on T+2 day. Similarly, when you sell shares your demat account gets debited on T+1 day. You can look at the demat account as a bank account that holds your investments in custody.
What do you do in case you are holding physical share certificates? You can actually dematerialize these share certificates by handing over your share certificates along with a signed demat request form (DRF) to your broker. The shares will be verified and then dematerialized and after cancelling the certificates, the equivalent number of shares will be credited to your demat account.
Where do you open a demat account?
Just as you go to a bank to open your bank account, you can go to a depository participant (DP) to open a demat account. Most often your broker also is the DP and hence the task becomes much easier for you.
The DP does not hold your shares with them but they hold these shares on your behalf as representatives of the two national depositories viz. NSDL and CDSL. These are institutions that are sponsored by government owned bodies so your shares are absolutely safe in your demat account.
Is it compulsory to have a demat account?
If you want to buy and sell shares then it is mandatory to have a demat account. Today nearly 99% of the shares in India are already dematerialized and 100% of the settlements on the stock exchange happen only in demat form. Therefore, if you want to buy and sell equities then a demat account is a must.
Even when you apply for IPOs, your demat account is required as the shares allotted will be directly credited to your demat account. Of course, in case you only want to trade in futures and options then demat account is not required since futures and options are contracts and they are not held in a demat account. However, if you intend to trade in equities then demat account is mandatory.
Does the demat account reflect my intraday trades?
No, the demat account has nothing to do with your intraday trades. An intraday trade is when you buy in the morning and sell the same day or when you sell in the morning and buy back the same day. An intraday trade does not result in delivery and hence there is no question of impacting your demat account. Only trades that result in delivery will impact your demat account.
What are the assets that I can hold in the demat account?
Apart from equity shares, you can also hold mutual funds in your demat account. Every stock that is eligible to be held in your demat account will have a unique ISIN number. You can also hold gold ETFs, index ETFs, RBI gold bonds, institutional bonds, closed ended funds etc in your demat account. Demat account is nothing but a statement of ownership of securities.
Are there net worth requirements for opening a demat account?
That is not required. You only need to be above 18-years of age. To sign the demat agreement you need to be eligible to enter into a contract under the Indian Contracts Act. Therefore, any person who is eligible to enter into legal contracts is automatically eligible to open a demat account also.
Demat trading accounts can be held in the name of individuals, HUF, private limited companies, public limited companies and trusts. However, partnership firms are not eligible to hold demat account in their name and such demat accounts will have to be opened in the names of the partners.