As a kid, I always used to wonder how the buying and selling of shares takes place, and how was it possible for the stock exchange to do so. When I asked my father about it, he told me about something called a demat account. and demat account benefits. Let’s have a look at what Demat account is all about.
So, What is a Demat account?
Well, a Demat account (Dematerialised account) is a kind of repository for storing our shares and securities. This storage of stocks and securities is done electronically.
We can think about the Demat account as a bag for storing groceries that we purchase from the market. The only difference is that we store groceries physically in our bags, while a Demat account stores the shares electronically.
Okay, but why do we call it a dematerialized account? Is there any specific reason behind it?
Well, dematerialization in the stock market language, is the conversion of the certificate of shares (physical) that have been bought, into an electronic format. Doing so helps us in accessing and keeping track of our purchased shares seamlessly. Furthermore, we can access the information on our shares from anywhere around the world.
So, to store this information, we must require an account or some repository. Hence the name Demat account is given to such accounts.
Types of Demat Account
"Wait! So there are different Demat account types?"
Yes, they do have types, and you better make sure to choose the right one for yourself.
Regular Demat account is used by an investor who's residing in India. This is one of the most common Demat account types.
- Repatriable Demat Account
This Demat account is used by NRIs. Under this account, funds can be easily transferred abroad. An NRI would need an NRE (Non-Resident External) bank account to open this Demat account.
- Non-Repatriable Demat Account
This Demat account is also used by NRIs, but in contrast to a repatriable account, the transfer of funds is restricted to abroad. An NRO (Non-Resident Ordinary) bank account is necessary to open this account.
- Basic Service Demat Account (BSDA)
This Demat account is referred by those investors who have a low portfolio size, and want to trade less. If you're expecting holdings of less than Rs 2 Lakhs, then BSDA is ideal for you. Furthermore, you won't need to pay any maintenance if your holdings are less than Rs 50 thousand.
So, it's an ideal Demat account for small investors.
Demat account vs Demat Trading account
In our discussion so far we've only covered Demat account. While it's an important prerequisite for trading in the stock market, it is not sufficient to just know that.
A Demat trading account is what we need, for transferring our funds.
Demat Trading account is a place to store and extract our funds for purchasing shares. It could be thought of as a bank, but without any interest rate. Trading account supplies you with funds for buying shares and reflects any gains you've made while trading.
In contrast, a Demat account is a place for storing our physical certificates electronically. Thus, a Demat account keeps tracks of shares we've purchased.
To summarize, a Trading account is needed for storing the funds, while a Demat account is needed for storing the purchased shares and securities.
Pros of having a Demat account- Demat account benefits
So far, we've discussed what a Demat account is, along with covering its types and stating their properties. But why do we need a Demat account? What are the benefits of having a Demat account? And is it compulsory to have one?
Let’s answer these questions one by one, starting with the latter.
As it turns out, SEBI (Securities and Exchange Board of India) had made it compulsory for investors to have a Demat account. This decree was sanctioned by SEBI back in 1996. So, there's no question of not having a Demat account, if you're looking to trade in the stock market.
Now, coming to our former question, these are some advantages Demat account provides (Demat account benefits):
- A Demat account is not just a facility for storing your shares. It also offers securities for them, hence eliminating the risk of forgery and loss/damage to your certificates.
- A Demat account ensures the seamless and swift transfer of shares. Once you've secured a trade, those shares are transferred automatically to your account.
- With a Demat account, you can easily trade on the go, even with your smartphone.
- Finally, having a Demat account eliminates the costs of registrations like stamp duty.
Demat account for Minors
Although the contract law in India prevents minors (under 18 years of age) from trading in the stock market, they are, however, eligible to trade under adult supervision.
The Demat account will be operated by the legal guardian until the minor becomes an adult. Furthermore, the guardian must be the father of the minor or in his absence, the mother. If, however, in the absence of both, a court-appointed guardian shall be considered.
A minor is eligible for the Demat account even if he/she has no bank account. However, the legal guardian must have a Demat account.
The procedure for opening a Demat account for a minor is as follows:
- The legal guardian must provide an address, age, and identity proof, along with some photographs to the concerned Depository Participant (DP).
- Both the legal guardian and the minor must provide their PAN card details to the DP.
- After the successful verification of the submitted document, a Demat account will be created for the minor.
There are also some limitations in having a minor Demat account, such as:
- Minors with Demat account are not eligible to trade in segments like equity intraday (buying and selling of financial instruments on the same day).
- Minors are not eligible to have a joint Demat account.
- Minors can only do delivery based trading, meaning they won’t be given any margin in case they are unable to purchase shares.
- Finally, minors are not eligible to link their Demat account and trading account.
There’s no age for investing in the stock market. People like Warren Buffet started investing at the age of 11, buying his first shares for $38/piece. With the huge potential the younger population of our country possesses, it is prominent to allow them to trade in the stock market.
We have to keep in mind that they're minors only by the law, but they have all the time and patience to become a significant player in the stock market business.