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What Is A Demat Account And How Does It Work?

December 05, 2021 ,

A Demat account, also known as a Dematerialized Account, is a revolutionary platform introduced to efficiently manage and store securities in an electronic format.

This account eliminates the need for physical share certificates and simplifies trading and investment procedures for individuals in the financial markets.

In this article, we will delve into the intricacies of Demat accounts, exploring how they work, the benefits they offer, and the process of opening and operating one.

So, let's unravel the world of Demat accounts and discover how they have transformed the landscape of investing in a digitized era.

What Is A Demat Account And How Does It Work
Brief understanding of Demat Account

 

💸 Topic Of Contents:

  1. Introduction
  2. Brief about Demat Account
  3. Why is Demat Account Important?
  4. Where does Demat Account get open?
  5. How much money does it cost to open a Demat Account?
  6. What is the best place to open a Demat Account?
  7. Final Thoughts
  8. FAQs

 

Brief explanation about Demat Account

Demat account is the short form of Dematerialized Account, and the word dematerialized means to convert any paper document into digital form, saved in digital form. And account means keeping a record of things. Here the question is, which thing is dematerialized, it belongs to the thing.

If we go back in time, there was no digital banking at that time, that's why people used to keep money in cash; all transactions were done in cash. The problem was that people had to carry a lot and there used to be incidents of looting, money used to get lost, or notes used to get old and torn. Seeing this, people had to handle cash very carefully. If we talk about now, since the advent of digital banking, everything has changed since then. Now very few people travel with cash. In digital banking, we have money in digital format which is much safer than cash.

In the same way, earlier if someone used to buy a share, he would get a share certificate which was in the form of paper; this certificate was the only proof that who was the owner of the share. There were a lot of problems in this, such as share certificates were lost, people used to make fake share certificates, or they got spoiled by keeping for certificates. Due to these reasons, investors used to face many problems. Because of all these problems, the government decided in 1996 that from now on all share certificates will be in digital form, meaning all share certificates will now be dematerialized and will be saved in digital form. And buy-sell of shares will also be in the account in digital form; this account is called Demat account.

Our money is saved digitally and what we spend is recorded in our bank account. This means such an account in which our purchased shares are saved in digital form and where our buy-sell takes place, is a Demat account. So if you buy shares of any company then it gets saved in your Demat account. You can think of a Demat account as a part where only and only shares are kept. If you buy a share, then the share gets saved by going to this page, even if you sell the share, it is saved by exiting this page.

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What are the benefits of Demat?

There are several benefits of having a Demat (dematerialized) account for trading in the securities market, such as:

  1. Convenience: Demat accounts eliminate the need for physical share certificates by converting them into electronic format. This makes it convenient for investors to hold and transfer securities without the risk of loss or damage to the physical certificates.
  2. Safe and secure: Physical shares can be vulnerable to theft, loss, or destruction due to natural disasters. Demat accounts provide a secure way to store and manage securities as they are held electronically, reducing the risk of fraud or theft.
  3. Easy transferability: With a Demat account, shares can be easily transferred from one account to another, eliminating the need for the cumbersome process of share transfer forms, verification, and physical transfer of certificates.
  4. Quick and efficient processing: Demat accounts facilitate faster and more efficient processing of securities transactions. Buying and selling of shares can be done swiftly, reducing settlement time and paperwork.
  5. Reduced cost and paperwork: Holding shares in a Demat account eliminates the need for stamp duty on the transfer of shares and also reduces paperwork involved in traditional share trading, like filling physical transfer forms or maintaining a physical record of transactions.
  6. Dividend and interest payments: Dividends and interest earned on securities held in a Demat account are directly credited to the investor's bank account. This ensures timely and hassle-free receipt of income. You can calculate the future returns using our Dividend Calculator.
  7. Access to online trading platforms: Demat accounts are integrated with online trading platforms, providing investors with real-time access to market data, research tools, stock analysis, and the ability to place orders from the convenience of their homes or offices.
  8. Nomination facility: Demat accounts provide the option to nominate a person who will receive the securities in case of the account holder's demise, making asset transmission smoother.

Overall, Demat accounts offer convenience, security, and efficiency in trading and holding securities, making them a preferred choice for investors.

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How to open Demat Account?

Just like our bank account is opened in any bank and the record of all our money is in our bank account, in the same way, the Demat account is opened in a depository company. Depository means the place to store and what is stored in the depository? Yes, it's shares. Just a small difference is that there are hundreds of banks in India where we can get our bank account opened, but for the Demat account, there are only two depositories in India where we can get the Demat account opened. The name of the first depository is CDSL {Central Depository Service Limited} and the name of the second depository is NSDL {National Securities Depository Limited}, our Demat account is opened only in these two depositories.

Now this question will come to your mind that how to open Demat accounts in brokerage firms? Friends, we cannot get the account opened directly in the depository like a bank account. Demat account is always opened through any brokerage firm. Any brokerage firm is linked to these two depositories. There are lakhs of brokerage firms in India, all of which are linked to either CDSL or NSDL, if you open a Demat account from any brokerage firm then your account will be open either in CDSL or in NSDL.

 

How much money does it cost to open a Demat Account?

Every broker has its charge for the Demat account, some broker charges up to 300, 500, 1000, or even 1500, but in the middle of all this, such brokers open your Demat account for free. Friends, if you find a broker who opens a Demat account for free then be alert because the commission charges of many such brokers firms are very high.

They open our account for free because they know that later they will earn more money from commission. So my opinion is that if a brokerage firm takes a little charge, then no problem, you can open the account because you will have to pay more commission for the year in order to save a little charge.

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What is the best place to open a Demat Account?

It is a bit difficult to answer this question because this person depends on the person. It is not at all necessary that you should like what I like, but I would like to give you some advice from the point of view of my investing. Savings are more important than investing, if you do not save money, then from where will you get to invest? Warren Buffett has rightly said one thing that a rupee saved is not at all different from a rupee earned.

I would like to advise you to open such a Demat account in which the account opening fee may be charged but the commission is very less so that you can save thousands and lakhs of rupees in the long run. And you can earn more money by reinvesting this saved money. Before taking any decision, especially money-related, you must think about what will be the result in the long run. Believe me, with this little thinking, you can save thousands of lakhs of rupees.

 

Final Thoughts

A Demat account is a digital repository for holding securities and other financial instruments. It simplifies the process of buying, selling, and tracking investments, eliminating the need for physical certificates.

By converting physical securities into electronic form, a Demat account streamlines transactions, reduces the risk of loss or damage, and provides easier access to financial assets. It operates through a combination of depositories, brokers, and investors, ensuring secure and efficient transfer of securities.

Embracing technology, a Demat account has revolutionized the way individuals invest, making it convenient, transparent, and effective for managing one's investment portfolio.

 

DISCLAIMER: This is an Education program and is NOT registered under any SEBI rules. All the information we provide is for educational purposes only and you should consult your financial advisor before making any investment decision. Also, WE DO NOT PROVIDE any kind of Stock Advice or Stock Advice or Portfolios. Description & Pressed Comments may contain affiliate links, which means that if you click on one of the product links, we will receive a small commission.

 

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FAQs On Demat Account

Is Demat account free?

There is typically a fee associated with opening and maintaining a demat account. However, the specific charges can vary depending on the service provider and the type of account. It is important to check with your chosen brokerage or financial institution for their fee structure.

Is Demat account useful?

Yes, a Demat account is useful for holding and transacting securities in an electronic format. It eliminates the need for physical shares and simplifies the process of buying, selling, and transferring securities. Demat accounts offer convenience, safety, and speed in managing investments. They allow investors to access their holdings anytime and anywhere, view transaction history, receive dividends and bonuses electronically, and even engage in online trading. Overall, Demat accounts are essential for modern-day investing in the stock market.

Which Demat account is best to open?

The best Demat account to open depends on several factors, including your specific requirements and preferences. Here are some popular Demat account providers in India: 1. Zerodha, 2. ICICI Direct, 3. Angel Broking, 4. HDFC Securities, 5. Upstox. It is advisable to conduct thorough research, compare the features and charges of different demat account providers, and consider your investment goals before making a decision.